Tax Hikes over $250k: End of the Upper Middle Class?

November 27, 2012

After winning a second term, the Obama administration plans to push forward with a tax hike on high income Americans. The current concerns over the fiscal cliff threshold have initiated faster actions, says the Fiscal Times.

Obama wants to start the tax hikes for those making $250,000 or more. This figure also includes working couples who have a combined income of $250,000. The tax increases on high-income earners would deliver about $42 billion in 2013. The increase will create a small 0.1 percent drag on gross domestic product (GDP), according to the Congressional Budget Office. However, the real cost might be much steeper.

No doubt, by most measures, a $250,000 household income is a large sum. Indeed, it is five times the national average -- just 2.9 percent of couples earn that much or more. However, one must also be cognizant of the cost of living in different regions.

  • $250,000 is a lot of money -- especially if you live in, say Peoria, Illinois.
  • 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 is known as "upper middle class," according to Roberton Williams, an analyst at the Tax Policy Center.
  • According to Salary.com, the cost of living in New York, for example, is 105.7 percent higher than in Peoria.

A theoretical working couple earning $250,000 annually, who also lives in a region with a high cost of living, has numerous financial responsibilities ranging from college and graduate school debt to housing costs in expensive areas.

  • 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 findings reflect that life is not an easy journey for working families earning $250,000.
  • Even with an additional $3,000 in investment income, couples 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.

Source: Jacqueline Leo, "Tax Hikes over $250k: End of the Upper Middle Class?" Fiscal Times, November 13, 2012.

 

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