What is the formula for income after adjusting for the effective tax rate?

What is the formula for income after adjusting for the effective tax rate?

• A. Income x (1 - Effective Tax Rate)
• B. Income x (Effective Tax Rate - 1)
• C. Income / (1 + Effective Tax Rate)
• D. Income - Effective Tax Rate

Answer: (A)

Post‑tax income comes from reducing gross income by the tax paid, which is a percentage of that income. Therefore, after‑tax income is calculated as income multiplied by one minus the effective tax rate. For example, with 100,000 of income and an effective tax rate of 25%, the after‑tax income is 100,000 × (1 − 0.25) = 75,000. This reflects that the tax bill (income × tax rate) is 25,000, leaving 75,000. The other forms aren’t correct because they either invert the relationship, yield illogical results for typical rates, or treat the tax as a flat subtraction of the rate rather than a subtraction of the tax amount (which equals income × tax rate). Dividing by (1 + tax rate) changes the math in a way that isn’t appropriate for calculating after‑tax income, and subtracting the rate alone ignores that taxes are proportional to income. So the correct formula is income × (1 − Effective Tax Rate).

Post‑tax income comes from reducing gross income by the tax paid, which is a percentage of that income. Therefore, after‑tax income is calculated as income multiplied by one minus the effective tax rate. For example, with 100,000 of income and an effective tax rate of 25%, the after‑tax income is 100,000 × (1 − 0.25) = 75,000. This reflects that the tax bill (income × tax rate) is 25,000, leaving 75,000.

The other forms aren’t correct because they either invert the relationship, yield illogical results for typical rates, or treat the tax as a flat subtraction of the rate rather than a subtraction of the tax amount (which equals income × tax rate). Dividing by (1 + tax rate) changes the math in a way that isn’t appropriate for calculating after‑tax income, and subtracting the rate alone ignores that taxes are proportional to income. So the correct formula is income × (1 − Effective Tax Rate).