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What’s Disposable Income?
After taxes, disposable income is the money left over for personal expenses, savings, and discretionary spending after meeting all tax obligations.
The formula for calculating disposable income is:
Disposable Income = Gross Income – Taxes
Where:
- Gross income Includes all sources of income, such as salaries, bonuses, and rental income.
- Taxes include all mandatory government taxes, such as income taxes, Social Security contributions, and Medicare taxes.
The disposable income is a key economic indicator, as it represents the purchasing power and, thus, the demand for goods in the economy. A higher disposable income means that people have more money available to spend on items other than necessities, which can help stimulate the economy. A lower disposable income may lead to a reduction in consumer spending, which could slow economic activity.
How to Calculate Disposable Earnings for Garnishment?
Follow these steps to calculate your disposable income for garnishment purposes:
Determine Gross Earnings
- Calculate the total income before deductions. Included in this are wages, salaries, bonuses, overtime, and other forms of compensation.
Subtract Mandatory Deductions
Subtract the required withholdings (including the income tax) from your gross earnings. Included in this are:
- Federal income tax
- State income tax
- Local income tax (if applicable)
- Social Security tax (FICA)
- Medicare tax
Note: Do NOT subtract voluntary deductions such as health insurance, pension contributions, union dues, or other similar deductions. To determine your disposable income, subtract only legally required deductions.
Calculate Disposable Earnings
- The disposable income is the amount remaining after subtracting all mandatory deductions.
Example Calculation:
Consider the gross income and deductions of an employee who has the following:
Gross Earnings: $3,000
Mandatory Deductions:
- Federal Income Tax: $300
- State Income Tax: $150
- Social Security Tax: $186
- Medicare Tax: $43.50
Step 1: Start with Gross Earnings:
- $3,000
Step 2: Subtract Mandatory Deductions:
- $300 (Federal Income Tax)
- $150 (State Income Tax)
- $186 (Social Security Tax)
- $43.50 (Medicare Tax)
Total Mandatory Deductions: $679.50
Step 3: Calculate Disposable Earnings:
- $3,000 – $679.50 = $2,320.50
In this example, the disposable income would be $ 2,320.50
Garnishment Limits:
Legal limits are generally set on the amount of disposable income that can be garnished. The maximum amount that may be garnished in the U.S. is usually the lesser of the following:
- 25% of disposable earnings, or
- The amount by which disposable earnings exceed 30 times the federal minimum hourly wage.
There are different types of debts, such as child support and tax obligations. It is important to follow the rules that apply to the particular type of garnishment.
Also See: Imputed Income
