President Biden has stated he will raise taxes on individuals making over $400K and married couples making over $450K to pay for his $1.8 trillion American Families Plan.
Once you make more than $400K/$450K a year, President Biden wants to raise the marginal income tax rate from 37% to 39.6%. This is the return to the top marginal income tax rate under George W. Bush. At 39.6%, the total marginal income tax rate if you include State, City, and FICA tax will be above 50%.
Under billionaire Donald Trump's tax plan, only after an individual makes over $518,401 does he or she pay the top marginal income tax rate of 37%. For married couples filing jointly, their income would have to breach $622,051 before facing a 37% marginal income tax rate.
$400K For Individuals, $450K For Couples
In the beginning, it wasn't clear whether Biden is making the $400K income threshold for the top marginal income tax rate for individuals or married couples.
If the $400K pertains to married couples only, then the income threshold for individuals facing the top marginal income tax rate will likely decline to somewhere around $300,000.
If the $400K pertains to individuals and married couples, then high-earning individuals best not get married! It would be much more tax-efficient to earn up to $400K per individual and just live happily ever after with another $400K-earning individual.
Finally, in September 2021, President Biden clarified he wants to raise the top marginal income tax rate to 39.6% for individuals making over $400,000 and married couples making over $450,000. Not doubling the income threshold for married couples to $800,000 mostly penalizes women, who also want to build successful careers.
In addition to raising the top federal marginal income tax rate, President Biden has also proposed raising the long-term capital gains tax rate for people earning more than $1 million from 20% to 39.4%. Therefore, more tax planning for high-income households is necessary.
Below are the 2023 income tax brackets for singles and married, filing jointly. Eventually, the top income tax rate of 37% will go to 39.6% if President Biden gets his way and tax changes are passed. Here are the 2024 income tax brackets, which have higher income threshold limits, but the same marginal income tax rates.
Finally, here are the 2025 tax brackets. It’s impressive that President Biden has been completely unsuccessful in raising taxes during his term. So for the next presidential election, I would take any tax increases or decreases with a grain of salt.
Is $400K Really Considered Rich?
President Biden has called anybody who makes more than $400K “rich” and should, therefore, pay “their fair share” in taxes. Two of the big benefits of the American Families Act is providing subsidized childcare and 12 weeks of parental leave. After a long period of lockdowns, helping solve child poverty should be welcome from both sides.
Nobody will doubt that earning $400,000 a year is a lot of money. A $400,000 a year household income puts you in America's top 1.8% income-earners according to the IRS. Therefore, by most metrics, you are considered rich with this income.
Sadly, earning $400K a year would have put you in the top 1% of income earners just 10 years ago. Today, you need to earn over $500K a year nationally to be considered a top 1% income earner today.
However, determining whether $400,000 a year is rich or just well off depends on where you live, your family size, and the type of lifestyle you desire. Further, one can feel rich without technically being rich.
There is no guarantee you will be wealthy due to a high income. We all know plenty of people who earn a lot, but equally spend a lot. As a result, they have nothing to show for at the end of each month.
I believe a middle-class lifestyle is all any of us can reasonably expect. Therefore, here is what I consider to be middle class and rich lifestyles. Of course, our definitions may differ.
A middle-class lifestyle can be defined as:
- Owning a 3 or 4-bedroom home
- Being able to afford to raise up to two kids
- Allowing one spouse to be a stay at home parent
- Saving enough to pay for their state college tuition
- Regularly saving for retirement in a 401k or IRA
- Going on 2-4 weeks of domestic vacation a year
- Driving a median-priced car (~$30,000)
- Nosebleed seats at a concert or sporting event
- A canoe for two to row on a lake
- Retiring in one's 60s and living comfortably ever-after
A rich lifestyle can be defined as:
- Owning a 5-bedroom or larger primary residence and at least one other vacation property
- Being able to comfortably afford to raise three or more kids
- Going on more than four weeks of vacation a year, including two weeks of international travel
- Driving a luxury car or two ($60,000+ each vehicle)
- A NetJets account for occasional private jet domestic travel at $10K/hour
- Front row seats to NBA basketball games
- A 100-ft yacht to sail the high seas with mysterious people
- Having the option of retiring before 60 if desired
- Having a lot more control of your time than the average person
Now that we've roughly defined the difference between middle-class and rich, let's go through the household budget of a family earning $400,000 a year in an expensive city.
Remember, $400,000 is the income threshold where taxes will go up. A $400,000 income should, therefore, be considered the lowest income level to be considered rich according to President Biden.
How A Family Of Four Survives Off $400K A Year
What's funny is that a CNBC reporter asked me to update my $300,000 household budget to $400,000 for his story. Then, in a 2-minute video clip, he only mentions a couple of soundbites. The internet then ran with it and made all sorts of interesting conjectures before I even got the chance to write this thorough post.
Instead of just talking in soundbites, let's analyze the nitty-gritty of how a family of four survives on $400,000 in an expensive city. At the end of each month, the family is left with $3 in cash flow.
You might scoff at being left with only $3/month in cash flow. However, the family can certainly make adjustments to boost cash flow if needed. Further, I bet a good portion of American households who suddenly find themselves earning $400,000 a year would likely end up with negative cash flow.
The $400K Budget
Take a look at the $400,000 budget below that so many people in America have already scoffed at. I've tried to make it as realistic as possible based on my family of four's own expenses in San Francisco (much less b/c we paid off our house) and after talking to at least 50 other $400,000+ households with two kids in a big city.
Your own expenses will obviously differ. Just don't forget to take into consideration your location, lifestyle, and household size.
Income & Tax Analysis Of A $400K Household
Earning W2 income is the least tax-efficient way to make money. However, that's what most $400,000 professional couples are doing. As a result, they pay a combined ~31% effective tax rate on their taxable income.
The 31% includes state income taxes and FICA tax on income up to the first $137,700. Since both parents are working, they pay FICA tax on $275,400. 7.65% FICA tax X $275,400 = $21,068.
Therefore, consider the FICA tax if you're deciding whether one partner should stay at home to raise the kids. Hopefully, Biden would only implement a new FICA tax on income over $400K.
Despite the availability of itemizable deductions, I've used the $24,000 standard deduction for a married couple to keep things simpler. There may be several thousand more in tax savings as a result.
However, the AMT does a great job of whittling away tax benefits for high-income earners. Further, only $750K of the $1.6 million is eligible for mortgage interest tax deduction.
Housing Analysis
Although I use a $2 million home in the budget, it's fair given the median single-family home price in San Francisco is about $1,650,000. After all, the house has four bedrooms and two bathrooms for four people.
You might still believe that $2 million means this household is living in a mega-mansion. However, I assure you that $2 million is just a regular home in a larger metropolitan area.
People who can't recognize this truth fail to compare the price to the median home price of a particular location. Everything is relative. Don't forget this core personal finance concept.
Below is a picture of a three-bedroom, two-bathroom, 1,992 sqft, single-family home that recently sold for $455,000 over asking at $2,150,000. That's right, this home not only has one bedroom less, but is also $150,000 more than the $2 million home in my budget.
The house is on the west side of San Francisco, which is experiencing strong intracity migration. The west side is cheaper, has more space, is less dense, has fresher air, and is closer to the beach and Golden Gate Park. As a family, you want all these things, especially if you can work from home part of the time.
People who are smart first try to relocate within their city to save money before deciding to uproot their lives and move to a place like Austin, TX where nobody knows their name. The best geoarbitrage strategy is to first relocate within your city.
Despite the $1,600,000 mortgage, within 30 years, the mortgage should be paid off. Therefore, the household will free up $80,952 a year in cash flow when the mortgage is gone.
This forced savings by owning a home is really one of the benefits of homeownership. The return on rent is always -100%.
The Cost Of Raising Kids Is High
A middle-class family should be able to comfortably afford up to two kids. As you can see from the budget, kids are expensive if both parents insist on working. Full-time childcare and preschool easily cost $2,000 – $3,000/month per child.
The positive is that if both kids go to public school once they reach kindergarten, this family will enjoy a nice income boost. However, many parents with a $400K+ household income want to send their kids to private grade school. Therefore, there's a good chance this household will continue to spend $5,500+/month for two kids on private school tuition for K-12.
Below is a private school tuition calendar for 2021. The cost of 17 years of private school tuition in today's dollars is $774,924 if tuition stays at 2021 rates. But tuition in 2024 is already 10% higher, and should continue to go higher every year.
I want six-figure, W2-earning parents to think about this question: What if my kids go to Harvard and end up a nobody? Will all that tuition spent be worth it? The internet has made everything free. Yet, schools like USC keep raising tuition, despite the pandemic. Therefore, the ROI continues to decline.
If you look at the statistics, private school and public school graduates generally end up earning the same amount and doing the same things. Please consider the public school or trade school route instead of your family cannot receive grants.
Tuition Keeps Going Up
Take a look at some private school tuition rates. Now add another ~10-15% for 2024-2025 rates.
If you want to have kids, it's probably best to seek advice from other parents. Surviving, thriving, and retiring with no kids is a walk in the park compared to if you have kids.
It's not just the cost of raising several kids that puts an extra strain on a household's finances, it's the time spent raising them, especially during a pandemic. It is absolutely exhausting taking care of younger children all day and trying to work.
But I would say for the vast majority of parents, they would never give up their kids for anything. Kids provide so much joy and meaning to a parent's life.
The angst and anxiety parents of high-income households have is real. They worry their kids will be downwardly mobile, not upwardly mobile in this ultra-competitive world. As a result, they seek generational wealth, but that's hard to come by for all but the very few.
Standard Luxuries
The family is driving a Toyota Highlander with 3rd-row seating ($38K). Sure, they could buy a new Range Rover Sport for $78,000, however, then they would violate my 1/10th rule for car buying since they don't make at least $780,000. They don't want to do what most Americans do and waste money on cars. Car prices have climbed really high, especially luxury cars, which can ruin your finances if you're not careful.
Instead of shopping at Gucci or Prada, the family buys clothes from Gap and Old Navy. They also wisely bought more unisex clothing so they can continuously pass their oldest child's clothes down to their youngest.
In terms of entertainment, the family stays mostly at home and watches Netflix and other shows on their electronic devices. However, they do like to pay for nice camping and photography gear for their weekend outings.
Finally, they are also ordering more food delivery to reduce their chances of getting COVID at the supermarket. It's an extra price they are willing to pay to keep their children safer.
Still Saving For Retirement On $400K
Although this household only cash flows $3 a month, the household's annual retirement savings is $39,000 due to both parents maxing out their 401ks.
Further, they are saving $9,000 a year in each of their kid's 529 plan. They could theoretically contribute up to $18,000 for each per kid ($36,000 total) and still stay within the annual gift tax exemption limit. However, they don't have enough cash flow.
If they really found themselves in a pinch, they could also free up $3,000 a year by eliminating their charitable giving.
With a $260,000 annual household expense, this couple won't be retiring anytime soon unless they can get their expenses down or income up. Even if they were to send both their children to public school, they would still have roughly $200,000 in annual household expenses.
At a 4% rate of return or 4% withdrawal rate, the household would need $5,000,000 in retirement capital. $5,000,000 is equal to 12.5X their annual earnings versus my recommended 20X multiple. Given they are only saving $39,000 a year for their retirement, even with a 6.8% compound annual return, it would take 50 more years to get to $5,000,000.
Unfortunately, interest rates have plummeted during the pandemic, meaning that it takes more capital to generate the same amount of risk-adjusted income. Therefore, it's more prudent for households to boost their retirement savings or lower their withdrawal rate in retirement.
A more conservative safe withdrawal rate of 2% would therefore require a $10 million retirement nest egg. A 1% safe withdrawal rate would require $20 million in retirement capital.
Therefore, it's best for this household to plan on earning supplemental retirement income after their day job days are over.
Difficult Arguments To Reduce Expenses
One of the most common arguments people who don't make $400K+ have about my $400K budget is that one parent should simply stay at home to save money.
Here's an example from Janet:
I don't know what each of the parents make, but let's assume the man makes 81% of the salary of the woman (a little reality flip there….). So she's got the better job, at a little $220K a year. His salary is $178K.
Now, he quits and stays home with the kids. Zero daycare, zero pre-school (or public or church preschool rather than private), so right there: $63K gone.
He also learns to cook and feeds the kids PBJs and egg salad and tuna fish, just like much of America, and bam: food costs down to $42 per day (based on the USDA “liberal food cost” for a family of 4.
As a stay at home dad, I think it's wonderful Janet recommends more dads stay at home. I'd love more company as I'm mostly chatting with moms in the forums and at the playgrounds. Homeschooling is definitely a great way to avoid paying for private school tuition.
However, there's one big hole with Janet's argument. She's saving $63,000 in expenses at the cost of losing $178,000 in gross income! After a 30% effective tax rate, $178,000 turns into $124,600.
Many parents have chosen to pursue money and their careers over taking care of their children full-time. Who are we to judge? Equality in the workplace right?
How About Relocating?
The other common argument is to relocate to a lower-cost area of the country to save money. Although it may be easier now due to the pandemic, unfortunately, not all jobs are able to be performed remotely.
For example, if you are a doctor, it is highly unlikely you will be able to earn the same amount of money working remotely. Doctors earn about 50% less if they do telemedicine. Further, you can't operate on a patient online. At least not yet.
If you are a techie, you may be able to work remotely. But you may also receive a pay cut and be passed up for promotions once the coronavirus is better contained.
Finally, if you are a minority, you might not feel as comfortable moving to the Midwest or the South. It's only natural to want to live in a more diverse environment with more people who look like you.
Once you’ve built your community, it’s hard to leave your friends behind just to save a little more money.
With the pandemic hitting the lower-cost heartland the hardest, many people are having second thoughts about relocating away from the coastal states. In fact, I'm noticing greater interest in migrating to California and New York given the coronavirus positivity rates are much lower.
Besides, with a Biden victory and a divided country, the political differences may be too large to overcome, even for white people who can easily blend in. Many people feel more comfortable residing in states that have the same political ideology as the president.
Therefore, I believe there is going to be a revival in interest of Big City Living again. For example, the coronavirus positivity rate in San Francisco and NYC is less than 0.9% versus 25%+ in many of the heartland states.
$400K Is Comfortable, Not Rich In Some Cities
$400,000 is a big annual household income. You can certainly survive just fine off $400,000 a year. However, based on the above expenses, a $400,000 household income only provides for an upper-middle-class lifestyle for a family of four in a big city.
The good thing is that Biden has decided the top marginal tax rate of 39.6% will start at every $1 over $400,000 after all adjustments. Therefore, depending on what the lower marginal tax rates are, a household won't really start feeling Biden's new top marginal tax income rate burden until people start making well over $400,000.
Good thing President Biden himself only has a $400,000 salary. Otherwise, he'd have to pay more taxes as well.
I would say that once a household starts making over $500,000 in AGI, will the household start noticing the pinch of higher taxes under Biden. At about $700,000, the pinch will start to feel like a body blow if all income is W2 income.
Take a look at the income required to be in the top 1% in Connecticut, New York/New Jersey, California, and the U.S. according to data from the IRS.
Given so much about the definition of rich depends on where you live, I think the minimum household income to be considered rich is $500,000 a year. But even at $500,000 a year, some households seem to just be scraping by due to poor personal finance habits.
Therefore, for a household to be considered unequivocally rich, I say it must annually be earning $1 million or more. At $1 million or more, you should be feeling rich every day. The only caveats are how much work is required to earn $1 million. We must also calculate how long the $1 million annual income can last.
Things To Consider For Higher Income Households
Everybody knows that if a $400K-income earning household with two kids wants to reduce expenses, it can. Everything is a tradeoff that only each household can decide. Here are some things to think about:
- Be proud and grateful of your $400K+ income. You are likely paying more than $100K in taxes each year, which is 99% more than all other Americans. Don't let people, including politicians, say you aren't paying your fair share because you clearly are. You're also probably killing yourself at work to make $400K+. Your taxes get redistributed for the greater good of the economy. Thank you for your service!
- Consider working less for greater happiness. If you're the sole-income earner making over $400K, I highly recommend taking things down a notch if you are feeling overly stressed. This unhealthy desire for prestige and money is going to cause burnout and dissatisfaction at home. If you have kids you won't regret spending more time with them. Neither will they. Your perfect income level might be $400K if you can work less and not have to pay more taxes.
- Make big money now to live like a King or Queen later. Alternatively, if you still enjoy your $400K+ a year job, take advantage until you can't take it anymore or get let go. Your saving rate needs to go up, preferably to at least 30% to build your passive income streams. In retrospect, I probably should have worked at least one more year to bolster my finances.
- Change the composition of your income. W2 income is taxed at the highest rate and requires the most effort to produce. Therefore, you would be wise to generate more passive income streams that are taxed at a lower rate. If you do, you can earn between 20% – 25% less in income to cover your expenses. But in order to do so, you must get that savings rate up.
- Get into a wealth-building mindset instead. The government goes after income harder. Therefore, you need to concentrate more on building a greater net worth. That said, beware of a potential reduction in the estate tax threshold under President Biden.
- Everybody thinks they know better. Never tell anybody your actual income and expenses because you will receive endless criticism. For example, I've read plenty of feedback from childless people judging parents on how to parent and spend. It makes no sense. The upside to everybody being a financial critic is that perhaps nobody is really hurting financially. If people were struggling, they wouldn't be criticizing high-income earners. Live the life you want. Remember, you don't need to win a financial argument. You win by getting rich.
A Comfortable Life Is All We Want
I gave up a six-figure income in 2012 because I was burned out. I also realized that I was happy living on much less. My out-of-shape boss, who probably made close to $1 million a year, was not someone I aspired to be.
My household is happy with a middle-class lifestyle. This is why we are shooting to consistently earn $300,000 a year in passive income. $322,000 is about what the California Association Of Realtors deems as the required minimum household income to afford a median-priced house in SF. Therefore, I use their estimate as our retirement income barometer.
Given we paid off our primary residence, we don't need as high of a household income to live comfortably. However, it's still fun to have goals. Although $300,000 is way less than the income I feel is necessary to qualify as unequivocally rich ($1M), what we lack in income, we make up for in time. Further, passive income is taxed at a lower rate and doesn't require working ungodly hours.
I'd much rather be poorer and free than having to work at a job I don't love. If you are making $400K+ and are not happy, please make some changes. Paying higher taxes while being miserable at your job is no way to live.
Personally, I plan to re-retire within the next 12 months now that the pandemic is over. I'm proud to have paid lots of taxes helped support all the stimulus packages. Further, I've been paying full healthcare premiums of $2,250/month so far. However, I'm tired of the grind and want to finally take things down a notch.
Very soon, it will be time to enjoy life to the fullest as the economy reopens!
Earn More Passive Income Through Real Estate
Changing the composition of your income is important if you are facing higher taxes and working too much. Therefore, I highly recommend building a real estate portfolio. Real estate is a much more tax-efficient way to earn income.
Not only is real estate a more stable asset class than stocks, real estate also provides shelter, and is a terrific beneficiary of inflation.
Thanks to the ability to deduct rental property expenses and the non-cash amortization expense, your tax bill goes way down or often disappears as a rental property owner. Further, in a low interest rate environment, the value of income is more valuable because it takes more capital to generate the same amount income.
If you don't want to physical own rental properties to generate income, take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore. Real estate crowdfunding is a way to own various types of property around the country and earn income 100% passively.
Favorite Real Estate Crowdfunding Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a eREIT from Fundrise is the best way to gain exposure in a diversified way. Fundrise is my favorite private real estate investing platform.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities potentially have higher growth due to job growth and demographic trends. For those of you with a lot more capital, you can build your own select real estate portfolio with CrowdStreet.
I've personally invested $954,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for about $150,000 in annual passive income.
Invest In Private Growth Companies
In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is Funrise's venture product. It invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The Fundrise investment minimum is also only $10. Contrast that with the $250,000+ minimum required by most venture capital funds. In addition, Fundrise provides a lot of transparency to prospective investors. You can see what its product is holding before deciding to invest and how much.
$400K Income And Higher Taxes Is An FS original post.
Have you taken a look at nytimes.com/2021/02/02/opinion/sunday/democrats-economy.html which talks about how the GDP and jobs grow during Democrat Presidents but slower when it’s a Republican.
This is a measurement of history and how Democrats are better for the economy and it shows with evidence. What is your evidence that Republicans are better for the economy?
If you measured this family’s year-over-year change in net worth, it would not be $3. This family is saving more every year than the median household takes in *before* expenses.
The row you have labelled “Cash flow” is called “Accounting error”. The family is saving a ton of money every year, and this table (that is clearly reverse-engineered to produce a tiny positive number of accounting error at the bottom) completely tries to hide that fact. Saving (in the form of 401(k), 529, or debt reduction) is not an expense, and an accurate accounting of this family’s expenses in terms of *expenditures* and *savings* would show a very large “cash flow” under its actual definition.
Thank you for breaking this down. Most people just hear $400k and they get so frustrated and feel as though no one deserves that income. We should absolutely normalize this level of income in major cities. On top of that, I feel like this is just another way our parties are pitting everyday citizens against one another. We have known for a long time that tax evasion is legal in many ways in the USA if you are *truly* rich – yet instead of tackling that issue of corruption we come after families making a comfortable living in large cities? It’s a deflection and I’m tired of debating IF this tax hike is right or not instead of “why is this the focus when truly wealthy people are not being taxed at all.”
This was very well thought out, the only thing missing is the political agenda hanging in the background. The last dozen years or so the seeds of our future currency debasement had been sown. Only during this pandemic and current administration has become super charged and likely to propel the middle class quickly into higher tax brackets as inflation drives the market. Twenty years from now as you sit at Starbucks with a friend having just a simple venti coffee that currently costs $2.95 you will enjoy the same cup but for $13.75 but wow you will have a million dollar mansion or shack depending on zipcode, and enjoy the privilege of paying taxes based on your higher income even though your income doesn’t go very far. Elections have consequences, I am not right wing, generally in the middle but maybe lean slightly right, mostly because l love people and want them to prosper, but when the political environment flips blue, well I make even more money since I know how to take advantage in the climate of chaos. Just like those hedge fund guys who invest in politics, which is genius, they get the writeoff and the benefit of their investment pays off big when their candidates win. Enjoyed the commentary, have fun at working home raising your kids that is the best time in the world and is fleeting. During the financial crisis I basically took 3 years off, and enjoyed my kids at the right time, now they are grown and I miss playing with them building legos and playing trains. Our world is ever evolving, ever changing, and despite the media, there is hope for humanity.
Thanks for reading. Personally, I think the best time to retire is under a Democratic president. There should be a larger Safetynet and higher taxes. As a result, it logically makes sense to take things down a notch.
And that’s what I plan to do in the year 2022. Meanwhile, I’m testing things out on my current sabbatical.
See: https://www.financialsamurai.com/the-best-time-to-retire-may-be-under-a-democratic-president/
It appears as though $400K to $700K earners are only looking at a tax increase of 1% or less with President Biden’s proposal, with the focus more on those that make a million a year or more This based on studies by the Tax Policy Center and the Center for American Progress.
If a couple is earning $400K and only giving $3K for charity, I have to wonder why they’re working so hard.
Probably to provide for their family and save for retirement.
But your comment is partly my point. What taxes going up, working so hard and not being happy it’s probably not as worth it anymore.
How much do you make and donate to charity? Thanks
Taking more from the 400k+ will only generate so much, because incomes this high are uncommon. Why not take a little more from everyone and raise a lot of money? I paid almost zero in federal taxes on 80k one year and then got killed in taxes during a 400k+ year. A lot more tax revenue could be gained by making a federal income tax floor of like 5% no matter what credits/number of kids you can claim. Too many people paying nothing, almost nothing, or even a negative federal tax rate. Biden’s new plan not only punishes the top earners but it babies low six figure earners with the new child credits. The unpopular reality is, every person in this country needs to pay up a little or we will destroy the dollar’s purchasing power.
Great post Sam! It really illuminates the spending of high income earners, even if they could trim their budgets significantly to free up cash flow. I covered this article extensively in a post of my own at Valuist and provided some back links. I mostly focused on the spending side and offer some adjustments to maximize savings; I hope you check it out some time!
To me “rich” means that you have enough money not to work and pretty much do whatever you want. I make over the $400k threshold and I absolutely don’t feel “rich”. I would term my families situation as being financially secure. No one that knows us would think we are “rich”. We live in a modest house, take a couple of modest vacations per year, drive a chevy and a honda. We do save quite a bit and invest heavily but there is not a day that does by where I feel “rich”.
How much household income do you think you would require to feel rich?
Related posts:
How To Feel Rich When You Can’t Get Rich
When Do You Finally Feel Rich? It’s Not Just About The Money
It’s because you’re out of touch with reality. I can’t help you, maybe you need to “Pol Pot” in the fields for a few months to get it.
Your Covid-19 stats are way off and now in 2023 meaningless since infection rates in vaccinated people is now in fact equal to or higher than non vaccinated individuals. Aside from that and your own point of view, the article was very clear and well written, I always considered rich as being able to fly private when you want domestically and first class internationally. So 400K is well off but not rich. Thanks for the good advice.
There is a huge flaw in your budget. You are not taxed 31% of your taxable income. Taxes are not calculated that way. It goes in brackets. For a married couple, your first $19,900 are taxed 10%, income from $19,900.01-$81,050 is taxed at 12% and so on.
Joy, what is your effective tax rate with a $400,000+ income? Please add up Federal, State, City, and prorate for FICA tax of 6.2% up to the first $142,800 in income.
What do you think the effective tax rate is for a $400,000 income?
Add up all the taxes, and you will find a 31% total effective tax rate to be about right. Please don’t forget State taxes.
Thanks
You people are crazy. $400,000 per year is rich. If you’re not the 1% you’re the 2%. If you’re richer than 98% of the people you’re rich. Imagine looking at a 36-inch yardstick and thinking that the one-inch mark is “the middle.” If you’re putting $39,000 pre-tax into retirement every year, you’re rich.
If you’re 51 and you’ve been putting 10% of your income into retirement for 30 years, you’re incredibly rich, especially because your retirement bundle has probably tripled or quadrupled in the last ten years. If you spend $7200 a year on vacations, you’re rich. And you know what? If you make 400k, your taxes are not going up.
If you make $450K, Biden’s intended tax hike will probably only cost you 1-2k, but you will bitch and moan like it is the end of the world. Biden is not going to raise the taxes of people who can save $39,000 a year and spend $7200 on vacation. Bill Clinton raised taxes on the rich, and everybody said it would be the end of the world, and the economy boomed. Obama raised taxes slightly on the rich and the economy crawled out of the hole the Bush crash put us in.
Bush and TRump lowered taxes on the rich and got no benefit from it. The worst thing is that none of you seem to care how many Americans are hungry, how many are without health care, how many cannot get mental health care, how many cannot get treatment for their addictions, how many have zero saved for retirement, how many cannot give, up their second jobs, how badly out infrastructure needs fixing, how many college students have to work jobs that interfere with their classwork.
You people are not just crazy. You’re horrible people. I don’t care how hard you guys work to make your money. You guys deserve to pay more taxes and I get to be the beneficiary of your tax hikes.
I’m not willing to work more than 40 hours a week to get ahead because I want to spend time with family.
I don’t care if people making over $400,000 a year are already paying a disproportionately high percentage of all income taxes. You guys should pay more to help us enjoy life more! We deserve free healthcare, lower taxes, and a better life.
Matthew 25:40.
Communist.
hahaha that’s so true! America is going through the cultural revolution that China went through, but didn’t Margaret Thatcher say, the problem with socialism is that eventually you run out of other people’s money to spend? Rich people won’t stay in this country and let lazy people get free rides. XD
I am curious. What is your career?
You’re right, they are horrible people. And may I add to that, Shameless.
Why is it that in every discussion on this topic, Biden refers to those making over $400k as billionaires? (Stephanopolous interview a few days ago ie). Complete kick in the gd face.
Bottom line is that $400k, (dare I say even $900k) is far from “Rich”. Most of us earning $400-$1m are taking it from both ends.
I live in the Midwest, have kids, save for college, drive nice, but not $70k cars, and am a layoff away from serious “oh f&$!”. Why? Not because I don’t have savings, but because I’m late 40s and have another 10-15 years to put kids through school and retire comfortably. Not with a net jet subscription or on the glass seats at a game…the definition and reality is totally disjointed as the author notes.
Ironically, was having a discussion with a friend in California that won’t pay a thing for the next 10 years (will get refunds) as a result of real estate loses and depreciation.
Tonight I go to bed worried about what next year brings, but according to joe I’m a billionaire… so I got that going for me.
It’s to help politicians push their legislation through to raise taxes on the people who are ineligible for stimulus benefits. Somebody has to eventually pay back all the spending and debt incurred.
So the somebody might as well be the people who already pay the most taxes and hasn’t benefitted from any direct stimulus payments and credit since the pandemic began.
Related: The Best Time To Retire May Be Under A Democratic President
I’m absolutely befuddled by this definition of middle class. This is an antiquated definition that does not at all reflect what middle class America looks like today. Please allow me to go step by step:
A middle-class lifestyle can be defined as:
Owning a 3 or 4-bedroom home (Agree)
Being able to afford to raise up to two kids (Agree)
Allowing one spouse to be a stay at home parent (Ridiculous–No one I know who is considered middle class can afford a single-income household. That is a privilege in this day and age).
Saving enough to pay for their state college tuition (Ridiculous. My parents are upper middle class and could not afford the entirety of my or my brother’s tuition. We both went to state schools. They were able to help).
Regularly saving for retirement in a 401k or IRA (Agreed)
Going on 2-4 weeks of domestic vacation a year (Who has an entire month off? I don’t know anyone who is middle classed and can afford this).
Driving a median-priced car (~$30,000) (30k seems high for middle class)
Nosebleed seats at a concert or sporting event (Sure)
A canoe for two to row on a lake (Sure? But weird)
Retiring in one’s 60s and living comfortably ever-after (To be decided. My husband and I are middle class millennials. I believe we will both be working at least into our seventies)
Sounds like you agree with 80% of the definition of middle-class. Count up the agreements and divide the total yourself.
$30K for a car does seem high, I agree. The average new car price is now $39,000 in 2021. That is absurd.
I’m surprised you don’t know any stay at home parents. Some would say it is a privilege to make enough to afford to pay someone else to take care of their kids. Do you have children?
I had about the same assessment as the reader. I also don’t know any stay at home parents. The closest I know are cases where one partner makes massively more (doctor) and the other is self employed (musician, artist/artisan, yoga teacher, misc wellness stuff), who still gigs and teaches on the side or can set their own schedule.
The one thing I’d disagree with is daycare. I know very, very few working middle class who can afford that type of all day daycare. It’s usually either just a few hours when the other spouse can’t cover, or someone in the family has to help (grandma, or neighbor at a reduced rate/exchange of babysitting at other times). Mostly again it’s the spouses working out their schedules for one or the other to cover.
That 529 plan amount is probably the most wild to me. I don’t know anyone saving anything near that for their kids’ tuition.
I’m also going to have to agree with the others about the SAHP. That’s seems like a luxury to me in this age of working mothers. Some of that is probably by choice (back in the 50s there was much less opportunities for women even if they wanted to work), however I suspect because incomes haven’t been rising over time, more family find themselves requiring both parents to work to be able to afford some of the other items on the list.
My parents are lower-middle class and my mother hasn’t worked in decades. They never made more than $55k in a year and are retiring in their middle 60s comfortably with no mortgage on their 3 BR/3BA 2400 sq ft home. (They did inherit about $30k about 15 years ago as the only outside $ source they’ve ever received)
On the flip side, my parents didn’t provide a dime for college for me, and with the exception of a $500 loan that I paid back in 2 months in my early 20s, never provided any financial support to me once I turned 18 (I didn’t ask either, I strived to be independent).
I do agree $30k for a typical middle class car is high – but the average vehicle is now $40k. I make way, way over the median in the US and just a month ago spent that much on a new vehicle (for the wife). A lot of people just can’t help themselves when it comes to vehicles I suppose.
There is no reason a middle class person can’t retire in their early to mid 60s just doing the 401k @ match levels, much less paying off your mortgage, doing the IRA thing, and putting other savings away. One thing a lot of people don’t realize is how much lower your taxes are in retirement – no FICA taxes, Roth income is free, and your other income is lower than when working so the standard deduction and next tax brackets make up a much larger % of your income.
Add to that not having to buy clothes for work and drive to/from work 5 days a week, not having to save for retirement, combined with no mortgage, your cost of living could easily be 40-50% lower in retirement than when you were working. Throw in SS and could be 50-70% lower of other income needed in retirement.
“Many people feel more comfortable residing in states that have the same political ideology as the president.”
I’m not sure if you meant the current president (Trump) or the president-elect (Biden). But either way, this sentence is probably very true — just for a different set of people.
So basically we work our whole lives 20 plus years make over 400k because we work 12 hours 6 days a week and now we have to pay more taxes because people can’t get it together and want free money for college and not working. I started with nothing when I was young not making much and I worked my way up thanks joe for threatening to tax me because I’ve worked so hard. Why don’t the lazy millenniums just go to work and pay there share as we did? If he goes through with this we should all not pay our taxes then see what happens to this once amazing country.
Billions of humans have worked 60+ hours a week, since the beginning of time……..
When Dwight D. Eisenhower was president, the marginal tax rate was 90 plus percent………
Joe Biden will raise the taxes and the national debt/budget deficits will continue to surge.
****Panama Papers****
My wife and I relocated from NYC to Texas and that went a long way in increasing the amount we save and actually being able to afford a house.
Modviz,
Good morning
I sure pray to God that you were the rare New York Republican who just moved south!
Or at least!
That you will convert due to your own acknowledged realization of the difference between the two parties!
God have mercy on America if you are a Democrat!
Turning Texas Blue means communism is guaranteed for America’s Future!
We should all gather together in prayer that the Californians and New Yorkers who are running to the Red states from their communist controlled Blue states are also changing their own politics to Americanism when they move and not bringing the communist principles of the blue party with them and their votes!
Congratulations on your move to the conservative life we all hope to have!
I hope to retire in Texas myself someday so if you are a Democrat no worries we can just cancel each other out and be cordial acquaintances anyway.
Regards
Chris
Cool. So by that reasoning, the vast majority of the country lives in abject poverty. Good to know.
This article is great and I actually plan on doing a ton of lobbying on this if we lose the senate which means this will actually pass. The only thing I really really wish you would have changed is the $2m house line. I’ve been making your same exact argument to everyone in the world and use almost identical numbers except the home purchase price. I live on Long Island so our numbers are very close on many levels but a middle class or upper middle class house on Long Island is in the $500 – $800k range. So I think you lose a lot of audience with the $2m gaudy price point.
Not sure why you consider $2 million gaudy. You can see many upper middle-class homes for around $2 million and above here. It’s just what the price point is in several parts of the country where the cost of living is higher.
Ok maybe “gaudy” not the right word. But if one is trying to appeal to legislature on this issue and one is already fighting an uphill battle since the average person thinks 400k is a lot, one can achieve a similar argument with using an $800k house. I just think once you say “$2m” for a house then even people in high cost of living areas discount the article. I’m on your side and $2 probably still falls within upper middle class so again, I’m with you. But you can make almost as compelling argument using $800k and $22k in or property taxes. FYI a $2m house on Long Island would yield about $30-$35k in property taxes so that line would increase but of course the mortgage would decrease. I realize this wasn’t written solely for long islanders just making a point that $2m would joy be the number I would have used here.
The analysis leaves out SS and Medicare tax on a
all earnings that goes to 3.8% at $250,000. I pay $19,000 on $1.2 million dollar house and the insurance is $3600/year with a $7,500 deductible. The plan to slap 12.4% on top of 39.6% and 3.8%, it is unfair to those making ordinary income. Biden wants to tax my earnings to pay off student loans without any limitations. $400,000 is not rich and the tax plan is unfair.
I agree completely. You will pay much more in SS tax but the benefits you will receive will at best be based upon only the first approximately 120k of income. I suspect Biden may go further and means test SS such that those with higher incomes will never receive anything. After seeing his cabinet choices it is obvious that the US will return to regime change wars.
This is always good–if controversial–analysis. “Large” incomes are only meaningful if put in the context of the cost of living. Cash flow–like in business success–is the real metric to use for comparisons. Bad cash flow projections equate to risk.
When we lived in DC, people that had children were considered “clearly well-off.” Most people we knew waited to have kids or moved to the far suburbs and sucked up the commute time as a cost of having children.
Yes, sadly, just being able to have children and afford children in a big city now seems like a luxury. So many things have to go write before and after.
I’m not sure why some people can’t see that have a couple kids has historically been considered a middle-class lifestyle.
If we are talking about 4+ kids, now that is a rich lifestyle.
People are going to be butt hurt likely because it can be construed as being tone deaf with most people making far less. However it is the bitter truth, kids are unaffordable for most in VHCOL areas.
There’s nothing on there that screams upper class. Sure you can make cuts to the budget accordingly and survive on less but at the end of the day these expenses are things that would typically be considered middle class. Eh, who needs to retire anyways?
Personally, I am not affected by this tax increase but the focus on increasing taxes for the “rich” in the name of social morality is frustrating. The government has shown time and time again to be vastly inefficient with politicians pocketing a portion of proceeds. It’s easy to support it when you aren’t affected but that doesn’t make it right, it just makes you a hypocrite. You’re voting to forcibly take even more of someone else’s money to support spending on expenses that they might not even morally/politically agree with. Then you pat yourself on the back for making the world “better”. All a bunch of crabs in a bucket.
It’s just human nature to vote for a politician who will raise taxes on one group without being willing to pay more taxes themselves. The 3 months of stimulus negotiation stalemate as we enter a new coronavirus surge is a good reminder of government inefficiency.
Th government won’t save you. You need to save yourself folks!
I’ve been a subscriber for a year or two now. This comment just made me unsubscribe. Making over 13x the median income isn’t usually the product of hard work and determination, but the results of privilege and unequal opportunity. I live in a VHCOL city and am living a moderate lifestyle for under 150k. 400k is unfathomable to me and while I know it wouldn’t make me the 1%, it would afford so many luxuries and conveniences I know are unattainable to the lower/lower-middle/middle class.
Saying that a 400k income is a struggle because of tax increases is so tone deaf because a minimum wage job is actually a struggle. You don’t need a 2M house or private school for the kids. Those are all luxuries if you ask me.
When the number of billionaires increased by 30% during the pandemic (vox.com/recode/2021/4/6/22370351/billionaires-forbes-inequality-pandemic) I can only imagine that even the 400k income earners also increased their net worth disproportionately to the rest of America.
I originally subscribed to you because you were also Asian-American and seemed to have a different mindset from the other white bloggers. But you seem to be so far out of reality now that you don’t understand the racial inequality and systems that continue to oppress in the US today.
Thanks for subscribing James! And best of luck.
I hope we all do pay more in taxes and do more to help others in this bifurcated wealth world. I’ve paid six-figures in taxes for 20 years now and play to keep on writing on FS to help others achieve financial freedom to. No pay walls, despite the trend!
Related: Three White Tenants, One Asian Landlord: A Story About Opportunity
I still fail to understand why you hope we all pay more taxes. It is almost as if you support the military industrial complex, corporate welfare, alien smugglers, etc, etc.
I worked for the federal government for 26 years and I regularly saw the significant waste and mismanagement. Just one very simple example – I remember our motor pool supervisor requesting five new tires for one of the fleet vehicles. When I mentioned that the vehicle only had four tires, he stated that they always replaced the spare tires as well. I simply told him to choose the best of the four tires on the vehicle and consider that the new spare, assuming the current spare was not in better condition. Now imagine this kind of waste across the entire federal government. As long as the waste continues, I can never support increasing taxes and pretending that it is going to help someone. If you truly want to help someone, then please use your own funds and do not support raising taxes.
I agree with most of this. However I think modern middle class families require both parents to work. Being rich is the only way you can have one parent stay at home. Ie you either need to make 500k+ individual (ideally closer to $1M) to afford a partner to stay home, and that is upper class lifestyle at Bay Area prices (500k may be borderline upper middle class.) Middle class = two working parents + childcare without going broke.
Thanks for calling out the marriage penalty. I am voting Biden but I am annoyed he isn’t clear on if it’s 400k household income. So is this tax on individuals earning 200k or more? Now that would at least be fair—but I think there would be a massive amount of angry people making 200k with taxes going up when he said 400k. Or is it 400 married and individual?
Regardless of the financial implications of Biden’s tax plan, would you seriously consider voting in the alternative given the way our country has been ran for the past 4 years? I will gladly pay a higher tax rate to save our democracy and prevent our country from turning into a banana republic. In fact, I think it is our patriotic duty to do so. Policy can always be reverted down the road, but 4 more years of this train wreck will permanently destroy the country that we know and love.
It always amazes me how much the MSM has convinced a large percentage of the population how bad Trump is. Trump is the first president since Carter that has not started a new war and that by itself is worthy of merit. Much of what is portrayed is either misleading or taken out of context. This has permitted the democrats to select a candidate that under normal circumstances would have zero support. Not only will he not restore democracy, but he will ensure that we have an even more hard core Trump like candidate in 2024. I definitely have no desire to pay more taxes for the train wreck that is coming
No need for the MSM to do any convincing. All you need to do is listen to the words coming directly out of Trump’s mouth to gauge his competence for office, character, and allegiance to our Constitution.
The MSM glosses over most of Trump’s actions and focuses on his rhetoric which is often taken out of context or simply for effect. Just today Trump announced Sudan will establish diplomatic ties with Israel, making this the third country this year. Obaba/Biden 0 countries. Trump has yet to start a new war yet the MSM makes him out to be a war monger. Contrast this to Biden. In each of Trump’s four years in office he has deported more undocumented persons than Obama did during each of his first 4 years. Trump has created Opportunity Zones which will predominantly benefit people of color. He’s far from perfect but compared to Biden’s record he looks like a saint. However, personally I will not vote for either.
Oh yeah, didn’t start a war, but had a ton of allies killed in Syria when he pulled out.
When the best you can say about a president is that he didn’t start a war, when thats largely about the international situation, you know he’s a terrible president.
Not to mention being a laughing stock among his peers, and a ton of direct reports publishing books about how incredibly dumb Trump is.
Given that Trump is the first president in recent history to bot start a new war that is extremely positive especially when you consider the war on terror has killed more worldwide than covid. Of course it is over the course nearly 20 years but all of those deaths were preventable.
As for your Syrian allies, they were linked to Al Qaeda who if my memory recalls correctly were to blame for 9/11. I’m not sure why you would call them allies.
Trump may not be the greatest president, by far, but certainly better for the world than the last two.
After reading the breakdown, I see that you are making several choices that can easily go a different way. It looks to me that you are effectively doubling the costs of child care because you’re pay for childcare all day yet I also see school. I would have to ask for clarification on that and why there is a 529 plan for school? I understand education is important but the choice of private school over public seems very expensive in this case (We have our kids in private school but not anywhere near this price and we do live in Washington). Food at 65$ a day? That seems very high, we have two kids who are competitive athletes and they don’t eat that much. Over 25 % of your income is going to housing in one way or another, maybe a commute is a better idea. Please don’t misunderstand me, I love real estate as we own five rental properties and we have been able to achieve a very nice standard of living with significant cash flow after expenses on a enlisted military salary and teacher pay. While it is not a big item, why an umbrella policy if you already have life insurance for both?
If this were me, I wouldn’t have that mortgage (Kudos on the low rate). I would commute and put that extra 50K into other endeavors. I would cut my food budget the umbrella policy and change my phone plan and less charity (3 dollars a month makes you the charity case)
Actually its well over 25% IMO – A full 43.8% of after tax income is going to housing/utilities in this example which is insane IMO. I’d make the hour commute in a heartbeat and cut that down in half easily – I live in a 4k+ home with a pool/hot tub and half acre in one of the top 10 fastest growing cities in the country and with 20% down that same metric for me is about 12% of my after tax income – with a very similar income as this example.
I also was a bit confused on the child care and private school cost at those levels for a typical 1-2 kid family. That might be right with 3+ kids, though. I did the math on private school when I was in college and it just never made sense. College adds about $1M in lifetime income for the typical person. If you put that private school money into stocks each year till they are 18 then give them the entire nut at 35, you’ll be giving them about $2-$2.5 million, far more than the value of college, say nothing of the difference between private vs public school for tuition. The only reason private schools make sense IMO is for religious reasons or you are very wealthy.
I’m thankful that Sam actually did say 65 / day. Both parents are working 9-6 (some days longer). Likely getting home and settled at 7. If they cook, they’re not eating until 7:45, 8? All cleaned up by 8:30? Now time to get the kids ready for bed, get ready for bed, etc. Now have to get up at 6 in order to go to the gym, so need to be to bed by 10, 10:30. I’m not sure doing that EVERY day is feasible. Having prepared / restaurant food at our fingertips is a luxury, but very expensive. 4 entrees alone in a HCOL area is at least $20 (guess what, the crappy diner down the street in NYC charges $22 for an omelette), plus tax, tip, etc. The occasional food delivery makes it so you can attend to one thing for your kids, or that one personal thing you need to get done, etc. This doesn’t even include a somewhat regular date night.
So, say I start life just out of college making about 18k per year (about 48k in 2020 dollars). Perhaps I also had a couple of spells where I was even flat broke and out of work.
Now, with several decades of experience in IT, I might make a bit over six figures (and same story for my wife). Let’s say we make about that much again each year from growth of our retirement funds and life savings (most of which are not taxed due to half being in retirement plans (401k, Roth IRAs, Regular IRAs, etc.) and the other half being invested primarily in “buy and hold” mutual funds, FAANG stocks, certain blue chips, etc.
That’s 400k coming in each year. Are we rich?
Given that going out to dinner was a major indulgence for most of my life, that I’ve spent a lot of years working in jobs I was not enthused about, and training and retraining myself on my own time and dime, lived in modest homes even smaller than what real estate agents wanted to sell me, currently pay over 12k per year just in property taxes on a small townhouse, and still drive ten year old cars, I have certainly never felt rich. Had I been less frugal I certainly would not be where I am now.
And this is very temporary. I am very close to retiring now and the goal is to not be a burden on anyone, and to maintain or even slightly increase current after-tax, pre-savings, income . . . but never mind that. Some politicians have decided that, for the moment, I AM rich and are ready to put the kabosh on that.
They really need to apply an age modifier to this whole wealth business. In some ways I was wealthier the day I started my first full-time job. Seriously, if my wife and I could sign over all of our savings, investments, and passive income, etc. in order to have our bodies rejuvenated back to 23 again, even starting back at what we were making then, it would be a bargain. So who is the wealthier?
Offtopic: If Congress ever figures this out they will surely figure out a way to tax youth (probably would involve some euphemism for “indentured servant”).
There is also location to be considered. Let us say that, after my first wife’s death, and before I remarried, and moved to where I am now, I lived alone with my children in a house twice the size of this minimal lot line townhouse, but costing half as much, on a large wooded lot in an immaculately maintained gated community that had its own beach and was on a golf course, where the property taxes were a quarter of what they are here and there was no state income tax. And everything else was also cheaper, starting with electricity and gas.
If all a politician can do is throw up an arbitrary figure, without considered either location or age, then they have not a clue what is rich and what is not rich.
This is part of the problem with people that go into politics in their youth and have to be carried out of office in their old age, assuming they don’t just die of old age in office. They lose touch, even if they weren’t born to great wealth and never had touch.
Thank you. We are in the same boat. We’d like to retire comfortably and maybe enjoy what we’ve earned. But somehow that’s not acceptable to a lot of people. There is no way we can continue to even live in the home we are in now due to property taxes.
Doesn’t make sense in a lot (most) of circumstances but have you looked at a reverse mortgage? If you are set on living in the same spot they can make sense in some circumstances.
2 children = roughly 50% chance of same sex.
Therefore, roughly 50% of middle class families NEED a 2 bedroom townhouse.
Good observation. We have one of each, so yes, one bedroom for each child is likely going to be a necessity.
Im curious of why you would see this as gender dependent and not age dependent. I’d expect at a certain age the kids would like their own room regardless of same gender or not. Before that they could share a room.