## Tuesday, November 30, 2010

### How many people make more than \$250,000 per year?

How many people make more than \$250,000 per year?

The short answer: based on information from the IRS, fewer than 3% of tax returns (4 million returns out of 138 million total returns) claimed more than \$200,000 in adjusted gross income (AGI) in tax year 2006 (more current data is not available). By definition, the number making more than \$250,000 must be less than 3% (since some will fall in the range between \$200,000 and \$250,000.)

The long answer is pretty long – more than a thousand words long, judging by the length of this article. While I am not a CPA , or even a practicing accountant, I do have a degree in accounting and thoroughly enjoyed my income tax courses in college (yep, glutton for punishment). I’ll make an effort not to get too bogged down in technical terms in this article.

Why the question?

For whatever reason, \$250,000 has become a benchmark amount. During the presidential campaign, President Obama had a tax plan that would raise taxes on couples making more than \$250,000. Recently, the US House of Representatives passed a bill that would impose a 90% tax for recipients of bonuses paid by companies that received bailout funds. This tax would be imposed on people making more than \$250,000.

Why the source?

The IRS is in the business of determining how much money people make and have a vested interest in the accuracy of their data. I have a synopsis of their data in the table at the end of the post, and have also linked directly to their spreadsheet.

Definition of terms

Household – I am defining a household as any entity that filed a tax return. Note that people who do not have a tax liability are not required to file a tax return. These people tend to be on the low end of the income spectrum.

Income – This is definitely the tricky term. There are a few different things we could measure.

• Total income (line 22 of form 1040). Essentially, this is the result of adding up the money that comes in from all sources during the year – with the exclusion of tax-exempt interest income and the tax-exempt portion of some retirement benefits. This does include capital gains and business income (or loss). This is the largest of the three amounts I will describe.
• Adjusted gross income (AGI) (line 37 of form 1040). This is total income with a few deductions. For the typical person, the deductions would be for student loan interest as well as contributions to retirement accounts and health savings accounts. This amount will be smaller than total income, and this is what is used in the IRS statistics that I have used as my source.
• Taxable income (line 43 of form 1040). This is determined by taking the AGI, subtracting either the standard or itemized deduction, and then also subtracting the amount for exemptions (for tax year 2008, you would multiply \$3500 X the number of exemptions – basically, the number of people in your household – and subtract this amount from the AGI.) Taxable income is used to determine your marginal tax rate. (Note: the marginal rate is the rate that is applied to the top slice of your income – it is not applied to your entire income. Income is taxed on a stair step basis, with each chunk of income taxed at a higher rate). In the case of Obama’s tax plan, he would be referring to \$250,000 in taxable income, not total income or AGI.
The numbers

You can quibble with the numbers a bit. You may claim that some people cheat on their taxes, so that the number of people who SHOULD be claiming an AGI of \$250,000 is higher than the amount that actually do. You may claim that full-time students or single people should not be counted as households (of course, that argument could be countered by the argument that there are valid households that are not filing tax returns). However, it seems unlikely that you’re going to move the needle very much. The fact of the matter is that very few households earn more than \$250,000.

Other stats:
67% of returns had an AGI of less than \$50,000. 88% of returns had an AGI of less than \$100,000.

0.26% of returns – a total of just 350,000 households out of a total of 138 million – had an AGI of \$1,000,000 of more.

15,196 returns – roughly 1/100 of one percent – had an AGI of more than \$10,000,000.

The average (mean) number of exemptions per return was 1.99. The number of exemptions in the “less than \$5000 AGI” category is 0.95 (many are students who are claimed on their parents’ returns and thus cannot take themselves as an exemption) and peaks at 2.93 in the \$500,000 – \$1,000 range. This makes quite a bit of sense. The lower ranges are often going to have a higher concentration of single people, since those people have half the income of a dual-income married couple in a similar career.

“But nearly everyone I know makes \$X. These numbers are wrong.”

I have had people tell me that these numbers are too low, and that \$250,000 is not a lot of money in their location (big cities). It might be true – and probably is – that there is a higher concentration of the higher income jobs in the bigger cities. However, the vast majority of the households in these areas are still going to be below \$250,000.

I also think that people tend to look at their own situation and assume that it is typical. If you are college educated, you are actually not typical. Only 30 percent of adult Americans have a degree. Likewise, if you have a household income of \$100,000, you are not typical.

It’s very easy to fall into this trap, though. Our friends have tendency to have a income level that is similar to our own – even if we don’t make a conscious effort to ensure this. Why? Think of where your base of friends comes from:

Work – If these people have similar jobs, then it’s quite reasonable that their income will be similar to yours.

College friends – Do they have similar majors, and thus similar occupations?

Neighbors – Your neighbors can all afford homes in your neighborhood, which essentially places a floor on their income level.

Parents of your kids’ friends – School districts in many cities are not particularly heterogeneous. This is because certain sections of town have neighborhoods containing homes in a particular price range. If you put an elementary school in the midst of these neighborhoods, the children are going to come from families with similar economic backgrounds.

Table based on data from IRS Website (Excel file)

 AGI range returns % cum % % above ex/ret total 138,394,754 1.99 Under \$5,000 14,308,963 10.34% 10.34% 89.66% 0.95 \$5,000 – \$10,000 11,786,747 8.52% 18.86% 81.14% 1.25 \$10,000 – \$15,000 11,711,680 8.46% 27.32% 72.68% 1.67 \$15,000 – \$20,000 10,937,694 7.90% 35.22% 64.78% 1.80 \$20,000 – \$25,000 9,912,261 7.16% 42.38% 57.62% 1.92 \$25,000 – \$30,000 8,749,761 6.32% 48.71% 51.29% 1.95 \$30,000 – \$35,000 7,554,418 5.46% 54.17% 45.83% 1.99 \$35,000 – \$40,000 6,597,407 4.77% 58.93% 41.07% 2.00 \$40,000 -\$45,000 5,677,163 4.10% 63.03% 36.97% 2.09 \$45,000 – \$50,000 5,010,030 3.62% 66.65% 33.35% 2.15 \$50,000 – \$55,000 4,644,439 3.36% 70.01% 29.99% 2.27 \$55,000 – \$60,000 4,092,692 2.96% 72.97% 27.03% 2.31 \$60,000 – \$75,000 10,117,786 7.31% 80.28% 19.72% 2.45 \$75,000 – \$100,000 11,140,408 8.05% 88.33% 11.67% 2.69 \$100,000 – \$200,000 12,088,423 8.73% 97.06% 2.94% 2.83 \$200,000 – \$500,000 3,121,485 2.26% 99.32% 0.68% 2.89 \$500,000 – \$1,000,000 589,306 0.43% 99.74% 0.26% 2.93 \$1,000,000 – \$1,500,000 150,431 0.11% 99.85% 0.15% 2.88 \$1,500,000 – \$2,000,000 64,007 0.05% 99.90% 0.10% 2.84 \$2,000,000 – \$5,000,000 98,724 0.07% 99.97% 0.03% 2.79 \$5,000,000 – \$10,000,000 24,975 0.02% 99.99% 0.01% 2.83 \$10,000,000+ 15,956 0.01% 100.00% 0.00% 2.82

Legend
Column 1 – Range of adjusted gross income
Column 2 – Number of returns that fall into this range
Column 3 – Percentage of total returns
Column 4 – Cumulative percentage (percent of return that have this AGI or lower)
Column 5 – Percentage of returns that are above this range
Column 6 – Number of exemptions per return

Columns 1 and 2 are taken directly from the IRS spreadsheet. The other columns are calculations based on information from the IRS spreadsheet.

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