Down and Out on $250,000 a Year
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The Fiscal Times
December 7, 2010

Note: This story was updated at 5pm on Dec. 10. Sales tax numbers were recalculated to reflect new data. In addition, three new locales were added to the comparative analysis, bringing the total cities analyzed to eight.

After the heated battle over extending the expiring Bush-era tax cuts, a single number emerges from the crossfire: $250,000. It’s the annual income that President Obama and others have repeatedly used to define what it means to be "rich" in America today. And even though a tentative deal has been reached on the cuts, $250,000 is 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 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.

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 school districts, using national data on spending.

The bottom line: It’s not exactly easy street
for our $250,000-a-year family, especially
when it lives in high-tax areas on either coast.


The analysis assumes that this hypothetical couple – let’s call them Mr. and Mrs. Jones – are each on the payroll of companies, 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.

The bottom line: It’s not exactly easy street for our $250,000-a-year family, especially when it lives 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 tacked on to cell phone bills and the cost of gas, when combined, takes a massive bite out of earnings – in some cases even more than the federal income tax toll. And it’s not likely to get better anytime 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 percent. Gas taxes, alcohol taxes and hidden surcharges on everything from airline flights, ferry rides, soda, vehicle registrations and rental cars have also been stealthily rising. 

On top of that, additional tax increases for couples with salaries of $250,000 or more (and singles earning $200,000 or more) are scheduled to go into effect in 2013 under the health care bill passed last March. Plus, the Democrats and the Obama Administration support legislation that the House just passed which would raise income tax rates for higher earners starting next year.  

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. They are maximizing contributions to two 401(k)s and 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 kids. 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, they buy books, newspapers and magazines; they own computers and pay for Internet access. But the Joneses 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 school. They don’t even shop for groceries at high-end markets. (They spend what the United States 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 percent 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 kids activities. Unfortunately, the family would also probably save less, at the expense of their retirement or their kids’ educations.

Karen Hube

Karen Hube is a freelance writer covering taxes, investing and personal finance. In addition to her work for The Fiscal Times, she writes a tax column for The Washington Post and contributes to Barron’s. She began her career as a beat reporter at The