Question

Disposable income equals

personal income plus transfer payments. personal income minus personal income taxes. Social Security contributions minus personal income taxes. Social Security contributions plus transfer payments minus personal income taxes.

Answer 1

Answer: Disposable Income= Personal Income - Personal Income Taxes

Background Information

Personal Disposable Income= Personal(Individual's) +Disposable(which can be used for meeting expenses or making savings)+Income(Amount of money available)

Whatever an Individual earns as income is not used up in meeting expenses or savings. Tax is deducted from it and the amount left is called Personal Disposable Income.

What is Personal Disposable Income?

Disposable income, also known as disposable personal income (DPI), is the sum of money that is left to households for spending and saving after income taxes have been deducted. Disposable personal income is a key economic indicator and is used to compute and ascertain the overall state of the economy.

Example
Let’s say Thomas is self-employed and on an average earns an income of $48,000 in a year. He has to calculate his self-employment tax liability, which is 15 % of his earnings. And, he needs to determine his federal income tax liability.

His self-employment tax payment is $7,200 ($48,000 X 0.15).

Using the income tax withholding tables in IRS Publication 15, your federal income tax liability is $2,000.

Now that he know your tax liability, you can calculate your DPI using the disposable personal income formula:

DPI = $48,000 – $7,200 – $2,000

DPI = $38,800

Thomas' DPI is $1,446. He can use this amount to pay for necessary goods and services as well as non-essential items.