Quarter-Millionaire
Lately, some people have been complaining about the tax burden that could be placed on $250,000. Granted, much of this comes from blowhards, but it seems to be resonating, as people are reluctant to lump those who make $250,000 a year in with actual millionaires. This is ridiculous.
So, enough of this bullshit–let’s figure out just how much $250,000 a year actually is. This is going to be hyper-simplified–no investment portfolios or IRAs. Just what the average white-collar worker has to worry about.
Before we begin, let me again state that most of us have no idea just how much $250,000 actually is, and, on average, most of us never will. Less than 2% of Americans make more than $250,000 a year. That’s a pretty small number, yeah? To give you a comparison, 5% of Americans have a “serious mental health issue,” 2% of Americans think Mitt Romney’s first name is “Mittens,” and 5% of Americans would get divorced in order to work from home. Again, not a large number.
So, let’s break it down in terms that we can all understand. We’ll use Jack and Diane, a fictional, above average couple just trying to get by on their paltry joke of a salary. In each case I’ll try to use “reasonable excess”–nice stuff (they’re not living in some one-bedroom shack) but reasonable (no 14 bedroom mansions or a fleet of yachts). I’ll put them in California, which is an expensive state, so it doesn’t look like I’m trying to cook the numbers by using mortgage rates in Montana.
Here we go.
The first thing that happens is that damn federal government stealing money for things like highways, education, a court system, and national defense. Filthy commies.
According to the IRS, if Jack and Diane make $250,000 a year, they’ll have to $56,733 in taxes (assuming they file jointly). But it gets worse. Since Jack and Diane live in the People’s Republic of California, they’ll end up shelling out even more money for state income tax (about $22,602), not to mention Medicare and Social Security. After all that, they’re left with $161,459 for the year. They might as well be on food stamps!
You know what? Jack and Diane seem like they’re planners–that’s how they got so successful in the first place. So let’s give them a 401K. They’re over-achievers, which means they want to give the maximum you are allowed to contribute (which in 2012 was $17,000). At 6.8%, that doesn’t seem like much, but cut them some slack: Even if their employer only matches half of that number, Jack and Diane should have about $3.7 million in 30 years.
Okay, so our favorite couple is down to $144,459.
What’s next? A house, of course! Unfortunately, Jack and Diane live in California (as was previously mentioned), which means even after the bubble, the housing market is still pricey. Fortunately, they have a good credit score (720–not perfect, but definitely solid, which isn’t surprising given their income) and have chosen a modest $600,000 home in San Diego (5 BR, 3B).* The mortgage on that house is about $3000 a month.
This is a good time to point out that I’m using specific examples here instead of medians, which would be far more damning. For instance, the median mortgage payment in the U.S. is currently about the same as the median rental payment at right around $700. Obviously, that’s a huge difference, but I’m making a point and don’t want to be accused of being unrealistic.
Okay, $3000 a month means $36000 a year. Now J&D are down to $108,453.
They’ve got a sweet house, but you know Jack–he has to have a BMW (and it has to be brand new). He’s so vain. Sometimes Diane wonders if he’s the same man she married, the one who used to drive her around in that beat-up Chevy, tippin’ cows and countin’ stars. Have they grown that far apart? What has changed? And who’s this Amanda from work that he’s been talking about so much lately?
I digress. In California, a brand-new BMW 5-series on a 60-month payment plan comes out to $819.00 a month…and that’s at 6.9% financing. Come on, Jack and Diane–buy from someone you can trust!
But they went with the BMW, and now they’re down to $98,625.
Diane and Jack have two young children: A 4-year-old named Luke and a 9-year-old named Leia. Jack and Diane are busy with work, and so Luke goes to daycare and Leia attends private school. For Luke to attend daycare in California, it’s $7856 a year. Leia demands the best, and her private school in Huntington Beach comes in at $13,275, which is one of the most expensive in the state. That means Jack and Diane are down to $77,494.
Oh no! We forgot about utilities! The highest month of electric/water/trash in San Diego is $232, so let’s go with that number. That means $2784 a year. Plus they love electronics and so they actually go with Cox Communications “Gold” bundle at $167 a month (which includes a landline, in case they want to speak with a dinosaur). No cell phones for the kids, but let’s pencil in $200 a month for their iPhone data plans. Now they’re down to $70,306.
Car insurance on the BMW came out to just $96 a month (they went with AllState because they loved Dennis Haysbert in Heat), which makes sense given that Jack and Diane are 42 and 41, respectively, with excellent driving records. That leaves $69,142.
They like to go out to eat a lot and enjoy great dining at home (not that Jack would know–he’s too busy flirting with that whore Amanda!). It comes out to $1000 a month, leaving them with $57,142.
That means that, after all of those expenses, Jack and Diane are left with $4,761 to spend every month.
And by those expenses, I mean a $50,000 car, a $600,000 house, one kid in full-time daycare, one kid in the most expensive private school in the state, $250 a week on groceries, and the best cable system in the nation. And all of this in California, which has one of the highest cost of living rates in the country.
It sounds like you didn’t hear me, so I’ll say it again:
That means that, after all of those expenses, Jack and Diane are left with $4,761 to spend every month.
Free money. Whatever they want to spend it on, they can. Want to go to the Caribbean next month and spend a week at an all-inclusive resort? Because if you’re Jack and Diane, you can just go. If Diane wants a matching BMW, even after the insurance increases, they’ve still got over $3700 a month to spend. They never have to save for a vacation or a significant purchase of any kind. They never have to freak out about something unexpected coming along, like an emergency trip to the vet or emergency plane tickets to visit a sick relative (things that would really put a strain on most couples). They don’t have to worry. They. Are. Rich.
How rich?
The median income in the United States is $51,413. If you can’t math, that means Jack and Diane have more money to spend after all of their expenses than 60% of households in this country do before taxes.
Again, I cannot stress enough that this was all done using actual figures from California. Just imagine if you lived somewhere else (other than New York, Chicago, or Boston). Imagine if you lived in Texas or Florida, where there is no state income tax. Imagine if you lived near a good public school district, and you didn’t have to send your kids to private school. Imagine if you decided to get a new car that only costs, say, $25,000. Hell, I live in Lubbock, TX, right now. This is a $550,000 house for sale here: 5 BR, 4B, 4741 square feet. Not too shabby.
Am I saying Jack and Diane don’t deserve their money? Of course not. They (probably) earned it. They can do what they want.
But this country needs to understand that an annual income of $250,000 is anything but middle class. They are rich. And the sooner people realize just how rich that bracket is, the sooner we can have an honest discussion about the tax burden in this country.
Oh, and on a personal note, the .9% tax increase on people making more than $200,000 to pay for expanded healthcare for millions of people (including children) would mean Jack and Diane would have to pay an extra $2,500 per year. So, instead of having $4,761 to spend each month after expenses, they would only have $4,553 to spend on whatever the hell they wanted every month. Highway robbery.
*Author’s note: In all the excitement, I forgot to calculate property tax. I really don’t feel like re-calculating everything, and fortunately if I did it wouldn’t make a huge difference. In San Diego, CA, the property tax is actually not that bad: $3180 a year (about $265 a month). Some states are much worse, like Texas, where a similarly-priced house in Austin would run you about $11,880 a year, though Texas has such high property taxes because they don’t have a state income tax.