How many people make more than $250,000 per year?
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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.
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.
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.
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.
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.
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.
Comments
4 Responses to “How many people make more than $250,000 per year?”
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March 22nd, 2009 @ 3:08 pm
I didn’t realize that $250,000 was a magic number.
You are right that I look at my own situation and think of it as typical when it really is far from it.
October 13th, 2009 @ 7:13 pm
I like this post a lot. Well said regarding a delusional assumption that everybody goes to college and makes lots of money.
On the flip side, there are folks who say that everybody is looking for a job, but if everybody is us, and we are all still working, what’s up with that.
Is it true that only 2.3% of the population makes $200-500,000, and 0.4% make $500,000-$1million? I find that an amazing stat since 28 year old kids out of Top 20 business schools make $100-140,000 to start. At age 40, they are making 2-5X that.
Then again, here I got with delusionment. Thnx for the insights and hope to see you at FS one day!
There are so many cool blogs, I can’t keep track, but leaving a comment at my sites gets me up to speed!
best
Financial Samurai´s last blog ..Slapping Hands With Famous People, Saving Money At Events & Priceless Moments
Total Comments by Financial Samurai: 13
October 13th, 2009 @ 9:40 pm
@ Samurai – well, those columns are ver batim from the IRS data. I don’t see the IRS as having a political agenda (other than getting more money for its agency), so I trust the numbers more than the numbers of people who have an agenda of some sort (I’m not suggesting that YOU have an agenda, but many groups do).
Those guys from the top 20 schools … that’s quite an accomplishment, right? Meaning that it’s pretty rare and that they are outliers
It’s VERY easy to see the world through the lens of our own life. If you’re a dentist and all your friends are dentists, you’re going to subconsciously overestimate the number of dentists in the world … but how often do you see your dentist? Ah, so the ratio of dentists : people can be pretty high.
The next time you’re out and about, watch the people you interact with. The garbage man, the barber, the cashier at the grocery store – and, yes, the doctor, lawyer, and the dentist. In the course of a year, I spend a lot more time talking to waitresses and Target cashiers than I do talking to my doctor. Heck, most of the time when I see the “doctor”, I don’t even see an actual MD.
And that doesn’t even include the multitude of people you never see – the factory worker, the guys who sort packages at UPS, etc.
Oh, and I have been to your site a few times – I just haven’t made any comments yet.
October 17th, 2009 @ 10:27 pm
Hey Kosmo – Good stuff man. Didn’t realize you’ve stopped by several times already. Feel free to comment, even if you hate everything I write, b/c I love getting perspective from others.
You’re right about seeing things through your own life b/c after all, that’s really all one knows. However, everywhere I go, i see copius amounts of consumption, as if there was never a recession. I noticed this during the summer, and as a result, I decided to not sell my company stock and just ride things out.
In “Fortunes, Fortunes, Everywhere”, I write exactly about what you talk about. I observe incredible amounts of salaries from people who don’t even work! We’re talking $100K+++ pensions for firemen, police officers, longshoremen etc. It’s incredible.
So, when I see these stats, I do believe in the incredible wealth of Americans, and am pleased we will be able to recover.
Best
Financial Samurai´s last blog ..You’re Rich And I’m Rich, OK! You’re Still Rich And I’m Not As Rich, Not OK!
Total Comments by Financial Samurai: 13