• Dispoable income is the money that is left after paying taxes.payment image by Valentin Mosichev from Fotolia.com
  
  Disposable income is the amount of money an individual has left to spend or save after paying taxes. The exact formula used to calculate disposable income varies depending on who completes the calculations. Some agencies go beyond deducting taxes from gross income and also deduct certain necessary living expenses.
  
  

Taxes

• When calculating disposable income, the first items deducted from gross income are taxes. Federal, state and local income taxes, and any applicable unemployment, Social Security and Medicare taxes are deducted from gross income to determine disposable income. Depending upon the source of income, other taxes--such as capital gains, prize and inheritance taxes--may also be deducted to arrive at disposable income. Depending on how you calculate disposable income, other commonly deducted items may include wage garnishments and other compulsory items deducted from income.
  
  

Cost of Living

• Certain fixed costs may be deducted from income to arrive at disposable income. These costs are related to life's basic necessities. Rent or mortgage payments are included in this category, as are monthly utility bills and food costs. Health insurance and medical care costs may also be deducted from total income to arrive at disposable income. Income left after meeting basic needs is sometimes called discretionary income, rather than disposable income.
  
  

Miscellaneous

• Public welfare and charitable organizations take the definition of disposable income even further. These organizations may exempt child or elder care costs from inclusions in disposable income. Travel and other expenses related to work may also be deducted to arrive at disposable income. At times, a certain dollar amount per dependent may also be deducted from gross income to arrive at disposable income.