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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 (3.924 million returns out of 140+ million total returns) claimed more than $200,000 in adjusted gross income (AGI) in tax year 2009 (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 2008 presidential campaign, President Obama had a tax plan that would raise taxes on couples making more than $250,000. A bit later, 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.

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.

The Numbers
Table based on data from IRS Website (Excel file)

AGI	Returns	%	cum %	% above	ex/ret
Under 5000	12,959,560	9.22%	9.22%	90.78%	1.01
$5,000 – $10,000	12,220,335	8.70%	17.92%	82.08%	1.31
$10,000 – $15,000	12,444,512	8.86%	26.78%	73.22%	1.76
$15,000 – $20,000	11,400,228	8.11%	34.89%	65.11%	1.85
$20,000 – $25,000	10,033,887	7.14%	42.04%	57.96%	2.00
$25,000 – $30,000	8,662,392	6.17%	48.20%	51.80%	2.02
$30,000 – $35,000	7,679,458	5.47%	53.67%	46.33%	2.01
$35,000 – $40,000	6,692,189	4.76%	58.43%	41.57%	2.06
$40,000 – $45,000	5,828,859	4.15%	62.58%	37.42%	2.06
$45,000 – $50,000	4,967,553	3.54%	66.12%	33.88%	2.09
$50,000 – $55,000	4,547,861	3.24%	69.35%	30.65%	2.17
$55,000 – $60,000	4,118,100	2.93%	72.28%	27.72%	2.23
$60,000 – $75,000	10,028,933	7.14%	79.42%	20.58%	2.40
$75,000 – $100,000	11,463,725	8.16%	87.58%	12.42%	2.61
$100,000 – $200,000	13,522,048	9.62%	97.21%	2.79%	2.84
$200,000 – $500,000	3,195,039	2.27%	99.48%	0.52%	2.96
$500,000 – $1,000,000	492,568	0.35%	99.83%	0.17%	3.05
$1,000,000 – $1,500,000	108,096	0.08%	99.91%	0.09%	2.97
$1,500,000 – $2,000,000	44,273	0.03%	99.94%	0.06%	2.97
$2,000,000 – $5,000,000	61,918	0.04%	99.98%	0.02%	2.95
$5,000,000 – $10,000,000	14,322	0.01%	99.99%	0.01%	2.92
$10,000,000 or more	8,274	0.01%	100.00%	0.00%	2.91

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.

 
Editor’s note: this has become a very popular article. It has been nearly 2 1/2 years since its initial publication. At the time of publication, I used the most current data from the IRS – numbers from the 2006 tax year. On August 8, 2011, I refreshed this article with more current data, this time from the 2009 tax year. If you find this article useful, please help support this site by buying some items using the Amazon links on this page. The Soap Boxers contains articles on a number of topics – come back often! – Kosmo

First, the disclaimer. The Soap Boxers (SB) is not a tax professional. While SB makes every effort to provide accurate information, SB is not liable for damages that occur from use of the information. This information is only intended as a “jumping off point”. You should perform your own research or consult your tax professional before deciding on a strategy.

Many people are convinced that one of the two strategies is THE BEST, and that the other is a lesser strategy. Is this true? In a word, no.

First, I’ll explain the basic differences. With a Roth, you pay tax on the money, then invest it. When you withdraw the money at retirement, you owe no taxes. With a traditional IRA or 401(k), you take pre-tax money and invest in. When you withdraw the money at retirement, you do owe taxes. There are other differences, but I’ll focus on this. For the sake of simplicity, I will use 401(k) to refer to 401(k)s and traditional IRAs.

If your tax rate is the same now as it is at retirement, there is no difference in the amount of money you are eventually able to keep. Let’s assume that you have $10 to invest for retirement, you are in a 10% tax bracket now and at retirement, you can invest in a fund that will give you fivefold your money at retirement, and that you can withdraw 100% of funds at retirement. Obviously, this is a dramatic oversimplification for the sake of illustration.

Roth: You take the $10, pay $1 in taxes, then invest $9 in the fund. You are able to withdraw $45 at retirement.

401(k): You invest the entire $10. At retirement, the fund is worth $50. You pay tax of $5 and are able to withdraw $45.

As you can see, the end result is the same. The values only differ if your tax rate today differs from your tax rate at retirement.

What would happen if a drastic change were made to the tax brackets? Let’s say that suddenly, the tax rates were doubled – the 25% bracket became a 50% bracket. The Roth investors would be huge winners, as they have already paid taxes on their retirement funds – at the old rate.

On the flip side – what would happen if the rates were slashed in half – the 25% bracket became a 12.5% bracket? The 401(k) folks would be the big winners – they get to pay the future rate of 12.5% instead of the 25% that the Roth investors paid on their past investments.

Imagine the worst case scenario for Roth – a federal sales tax that completely replaces income tax. Roth investors would not have to pay income tax when they withdraw their money, but they would suddenly be taxed again with the consumption based sales tax.

OK, let’s take a step back. None of these drastic scenarios is likely to occur (if the sales tax ever occurs, there will surely be a Roth fix as part of the plan). However, relatively minor changes to the tax brackets could change your results. It is possible that the 25% bracket would become a 22% bracket or a 28% bracket. While you can’t base investment decisions completely on possible future changes, neither should you completely dismiss the possibility.

If your company matches a contribution, take advantage of it. For example, your company matches the first $1000 in a 401(k), dollar for dollar. You might be in a situation where a Roth typically makes more sense for you. However, you should still invest $1000 in the 401(k) in order to obtain the matching funds. You have just doubled your money. Even if you pay a higher tax rate on this money at retirement, you will come out ahead.

OK, let’s shift gears to the assumption that the brackets will remain pretty much the same, aside from being indexed for inflation.

When you are young and in the lower tax brackets – 10% and 15% – a Roth makes much more sense than a 401(k). It is pretty unlikely that you are going to end up in a bracket lower than 15% when you reach retirement age.

Big retirement next egg
OK, shift to age 50. You have invested very well, and you expect your post-retirement taxable income to be 150% of your current taxable income. Great – the Roth still makes the most sense for you.

Small nest egg
You haven’t invested as well as the last guy, and you expect your retirement taxable income to be 60% of your current taxable income. In this case, the 401(k) makes sense. Reduce your taxable income today with the 401(k) contributions, and pay the lower rate when you retire.

Big salary
Once again, you’re age 50. You have been promoted 4 times in the last 3 years and are making money hand over fist. You have invested pretty well over the years, but you only expect your retirement taxable income to be 60% of your current taxable income – simply because your income level has exploded. Again, the 401(k) makes the most sense.

Note that I have referred to taxable income, rather than gross income. Many factors can impact taxable income and shift the Roth/401(k) decision. An example would be mortgage interest. Perhaps you are currently deducting a large amount of mortgage interest and plan to have the house paid off at retirement. This will push your future taxable income higher (making Roth more attractive than it might have otherwise been)

Another example would be some sort of windfall income. Perhaps you earn a substantial amount of money from a sideline in a given year (book royalties, game show winnings, etc). This might cause a one year spike in taxable income and make 401(k) more attractive than it might be in other years. On the flip side, you might get laid off (or take unpaid time off) and experience a lower than usual taxable income that year – making Roth more attractive that year.

Remember to revisit your retirement options. Do not feel that once you pick an option, you must only invest in that type of retirement plan. When circumstances change, you may want to change the way you save for retirement. A Roth might make sense for you at age 25, but a 401(k) might make more sense at age 45.