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Is $250,000 a Year Rich? Let's Break It Down

Jacqueline Leo | Fiscal Times
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It's no surprise that working couples in big cities are struggling to raise children while paying off mortgages and student debt. What is surprising is that they're lumped in with the so-called "wealthy" if they jointly earn $250,000 a year.

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The has added a new sense of urgency to the tax hikes that President Obama plans to impose on America's wealthiest citizens. Obama starts the meter at $250,000, and it goes up from there. The tax increases on high-income earners would deliver about $42 billion in 2013. They would create a small 0.1 percent drag on GDP, according to the Congressional Budget Office, but their real cost might be much steeper.

Those tax increases aren't the only ones that would kick in next year. In California, new tax propositions will create four new brackets for earners making $250,000 or more. Those taxpayers will see their state jump between 10.6 percent and 32.2 percent, depending on their bracket. Other states in fiscal straits could follow suit, and Republicans, among others, worry that soaking the rich could weigh on consumer spending and leave the entire economy under water.

Discretionary consumer spending is the engine that drives the U.S. economy. And high-income earners drive it more than middle- and low-income earners. Gallup's daily tracking of consumer spending showed a dip last month among upper-income consumers — an average of $116 per day, down from $126 in September. If that dip continues into the holiday buying season, the economy could suffer a setback.

I'm Wealthy? That's Rich

By most measures, a $250,000 household income is substantial. It is five times the national average, and just 2.9 percent 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.

And $250,000 is a lot of money — especially if you live in, say Peoria, Ill. But if you live in or around New York City, Los Angeles, San Francisco, Boston, Chicago or Dallas, you're not rich — you're simply what's known as "upper middle class." It all comes down to cost of living, a metric that is not considered when the Census Bureau or the Bureau of Labor Statistics calculates the mean earnings of working Americans.

The cost of living in New York, for example, is 105.7 percent higher than that in Peoria, according to Salary.com. New York employers make up some of that difference by typically paying 29.9 percent more than employers in Peoria for the same job with the same type of company.  

Meet the Joneses 

Two years ago, 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 seven different locales around the country with top-notch public school districts, using national government data on spending.

The analysis assumes that this hypothetical couple — let's call them Mr. and Mrs. Jones — are each on company payrolls, with professional positions. They take advantage of all tax benefits available to them, such as pretax contributions to 401(k) plans and medical, childcare and transportation flexible-spending accounts. 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 percent of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.