What is Disposable Income?

Disposable income is the income that an individual or household has after deducting income tax. Disposable income is calculated by subtracting income tax from gross income. For example, if one were to make $500 per week and pay $50 in income tax, one would have $450 of weekly disposable income. 

A related term is discretionary income which is estimated by sDisposable income is the income that an individual or household has after deducting income tax.ubtracting expenses such as rent, mortgage, gas, and food from disposable income. Following the example from above, if one has $100 of weekly necessary expenses, discretionary income would equal $350. These leftover funds can be used to invest or spend on non-necessities.

Disposable income calculations are important in dealing with a variety of legal issues. Specifically, disposable income is key in situations of spousal payments, child support and bankruptcy. 

Key Takeaways

  • Disposable income is the income remaining after deducting income taxes.
  • Discretionary income is the income leftover once income taxes and other necessary expenses are subtracted.
  • Disposable income is critical in matters of bankruptcy.
  • The government also considers disposable income when determining child support amounts.

Disposable Income in Law

Disposable income is a common concept in economics that is pertinent to US law, particularly in bankruptcy law and family law.

Estimating one’s disposable income is a key step in filing for bankruptcy in the United States. One of the first steps in filing for bankruptcy is calculating disposable income. It is expected that disposable income will be significantly lower than the average in cases of bankruptcy. Additionally, one must prove to the court that one’s “best effort” is being made to pay off creditors. This means that in bankruptcy, disposable income should be allocated to these debts. In Chapter 13 bankruptcy, the disposable income is seized and dispersed amongst the creditors to pay off the debts.

Disposable income is also taken into consideration in family law, especially when determining child support and alimony payments. For instance, the amount of child support that must be paid by a parent is often calculated by taking a percentage of one’s net disposable income. Furthermore, disposable income reports are used by the government when one is refusing to pay or has delayed payment on child support. In these situations, the government subtracts a certain amount of money from the parent’s paycheck. The amount is determined by docking off a maximum of 25% from that person’s disposable income.

Bottom Line

Disposable income can be tricky to calculate, and it becomes even more confusing when discretionary income enters the equation. An attorney can help you determine your disposable and discretionary incomes. Moreover, a bankruptcy lawyer can guide you through the process of filing for bankruptcy and paying off your creditors. A proper family attorney can also consider your disposable income while assisting in determining how much child support or alimony you owe or are entitled to.

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