3/11/2011 1:15 PM ET|
Down and out on $250,000 a year?
It's the new magic number, the supposed threshold of wealth in America. But is a family with that income really rich? Can it even make ends meet?
In the ongoing debate over whether to use tax policy to help resolve the nation's massive deficit, a single number has emerged from the crossfire: $250,000. It's the annual income that President Barack Obama and others have used to define what it means to be "rich" in America today. And while the Bush-era tax cuts were temporarily extended to 2012, when their deadline comes around for the second time, $250,000 will be etched in the minds of policymakers and pundits as the number that separates the middle class from the wealthy.
By most measures, a $250,000 household income is substantial. It is six times the national average, and just 2.9% of couples earn that much or more. "For the average person in this country, a $250,000 household income is an unattainably high annual sum -- they'll never see it," says Roberton Williams, an analyst at the Tax Policy Center, a nonpartisan think tank in Washington, D.C.
But just how flush is a family of four with a $250,000 income? Are they really "rich"? To find the answer, The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.
The analysis assumes that this hypothetical couple -- let's call them Mr. and Mrs. Jones -- both have professional positions at their companies. They take advantage of all tax benefits available to them, such as pretax contributions to 401k plans and flexible spending accounts for medical care, child care and transportation. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80% of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.
The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill., and Pinecrest, Fla. In Plano, Texas, the couple's balance sheet would end up positive, but only by $4,963.
Taxes take a hefty toll. Everything from property taxes and the alternative minimum tax to the taxes added to cell phone bills and the cost of gasoline, when combined, takes a massive bite out of earnings -- in some cases even more than the federal income tax. And it's not likely to get better soon. States and municipalities have been steadily raising income tax rates to help close gaping holes in their budgets. Property taxes are also increasing, even though real estate values have cratered. And sales taxes are hitting record levels, in some areas nearing 10%. Gas taxes, alcohol taxes and hidden surcharges on everything from airline flights and ferry rides to vehicle registrations, rental cars and even sodas have also been stealthily rising.
On top of that, additional tax increases for couples with salaries of $250,000 or more (and single people earning $200,000 or more) are scheduled to go into effect in 2013 under the health care bill passed a year ago. Plus, the Democrats, who supported legislation to raise income tax rates for higher earners last year, will probably push for the same measure when the Bush-era tax cuts expire at the end of 2012.
Thinking about tomorrow
Being in the red on a $250,000 annual salary may still seem surprising. But taking responsibility for their retirement and their children's future is costly. The Joneses are maximizing contributions to two 401k's and to all flexible spending accounts available to them, and they are squirreling away $8,000 a year for their kids' college educations. And their spending is conservative, based on national averages for professional couples with two children. Not included are those hefty run-of-the-mill payouts for charitable deductions, life insurance premiums, disability insurance, legal fees -- or monthly sessions at the hair colorist, or membership at a gym.
As educated professionals, the Joneses buy books, newspapers and magazines; they own computers and pay for Internet access. But they don't take lavish vacations, don't belong to a country club, don't play golf, don't drive luxury cars, don't have a swimming pool, don't buy designer clothes, don't own or rent a second home and don't send their kids to private schools. They don't even shop at high-end grocery markets. (They spend what the U.S. Department of Agriculture defines as a "moderate" amount on food for the average family of four.) In short, they're not "wealthy," even if they're in the top 5% of earners.
In reality, to make ends meet, this squeezed couple would have to cut back on discretionary expenses -- take a pass on a new suit, skip an annual vacation and drop some of their children's activities. Unfortunately, the family would also probably have to save less, at the ultimate expense of their retirement or their kids' educations.
Taxes of every kind
Consider the tax profile of the Joneses when they're based in Huntington, a suburb of New York City. Thanks to all their smart pretax contributions and a fat deduction for mortgage interest and state and local taxes, the couple's federal income tax is only $29,344. But what often goes overlooked is the toll taken by state and local taxes. In this case, it exceeds that of the federal income tax bill: $31,066.
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it';s not what you make. it's HOW you spend it!!!
Dear author, you have no clue what it means to "make ends meet". I can assure you the $250k/yr family drives a new model car (or has multiple cars) and lives in a nice home. Meanwhile, the people that read this garbage have to live in shoddy studio apartments with family members sleeping on the floor because there aren't enough beds. They have appliances that don't work because management knows they don't have to fix it because those people are lucky to have any roof over their heads. They share a common laundry room and have to carry clothes up and down stairs and pay cash each time they wash clothes because their poor accomodations don't have washer/dryer connections. You should be ashamed writing articles like this. It is an absolute thumb-in-the-eye to every struggling family living paycheck-to-paycheck just to survive. To them, college is not even an option. Shame on you for publishing this insensitive trash.
I DON'T KNOW BUT WHEN I SAW THAT FIGURE AND THAT ARTICLE IT MADE ME VOMIT !!
250,000 A YEAR IS A LOT OF MONEY!!
They still want the prestige lifestyle taking care of all their families members just buttering them up with a very nice lifestyle !! IT WAS THEIR CHOICE IN WHAT THEY WANTED AND HOW THEY SPENT IT !!
DON'T CRY BECAUSE YOU MADE SUCH A WASTE !!
I only make 30k a year !!! Now feel that !!!
I would stop spoil in every area - you can become better users of money. Kids can learn when they are young that it takes WORK TO LIVE LIFE! I would surely teach my kids ahead of time and even put them in the military for at least 4 years of their lives! It's about becoming better and stronger people.
I make less than half that, pay spousal and child support from a previous marriage, live in a 3 bedroom rental property with my current wife and mother of 90 (we are her care givers). And guess what, I put more than $1K per month in the bank after 401k and flex spending. Let my kids worry about their own education, I did.
I don't feel rich, but I am grateful I don't have to worry about making the decision to fill the gas tank or eat.
Live on less and you will be happier!
The funny thing about this article is that when you look at how much someone makes, it's usually on par with what you can make, for the most part, doing the same type of job around the country. It may be a bit lower in some areas, but when you say that you make 250k a year, and feel the need to complain because it doesn't buy as much in housing, transportation, etc, it's hard to feel sorry for ya. If it's so tough to live off of 250k a year in Huntington, New York, there's an easy solution: move somewhere else! Though, of course, then those same people would just find other things to complain about...
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