Stern Advice: How much is $250,000?
WASHINGTON (Reuters) - From where I sit, $250,000 a year - the amount President Barack Obama and other Democrats say is top-tier household income - is a substantial amount of money. But I don't sit in Manhattan or Honolulu or San Francisco, where folks say they can easily blow through that much paying rent and childcare, and not living like kings.
Cost of living disparities are in focus now, and not just in the national tax debate. It's a big deal for families from expensive places when they apply for college financial aid. People who make, say $60,000 a year in Fort Smith, Arkansas - one of the least expensive places in the country, according to Kiplinger.com - have significantly more disposable income than people trying to make it on that much in Manhattan.
And the differences are startling. You can buy a four-bedroom, two-bathroom house in Redford, Michigan (just outside of declining Detroit) for $60,000, or pay $1.7 million for a similar home in Los Altos, California, in the heart of Silicon Valley, according to numbers released today from Coldwell Banker Real Estate.
You need to earn $250,000 in Los Altos, California to live the life that $60,000 provides in Fort Smith, according to the addicting cost-of-living-comparison calculator at Sperling's Best Places website (www.bestplaces.net/col/).
New Yorkers and Silicon Valley dwellers can abandon hope that federal tax rates will ever be adjusted to accommodate their higher incomes. "It would be way too complicated to do something like that," says Eric Toder of the Tax Policy Center. Furthermore, policymakers are reluctant to underwrite lifestyle choice. "If somebody chooses to live in an area like New York or California, they are getting benefits; being near the water, living in the city," says Toder.
Nevertheless, the tax code does offer a little bit of help to folks who live in high cost areas. They get to deduct state and local taxes, and mortgage interest. Even those provisions get criticized for making the tax code regressive - putting a bigger burden on low earners than high earners.
There has also been some talk of using a zip-code based adjustment to the mortgage interest deduction if that deduction gets capped in some grand fiscal cliff-avoiding bargain.
That's about it. Of course, you can really cash in on cost of living discrepancies if you line up a telecommuting programming gig at Silicon Valley rates and then make your home in the outskirts of Detroit or on the Arkansas-Oklahoma border. There a few other ways to either make the disparities work for you, or at least minimize their impact if you're on the other side of them. Here are some options.
* Dig into financial aid exceptions. Federal formulas for most financial aid don't adjust their so-called expected family contribution for cost of living, though they do allow a small adjustment for state taxes. But some 300 schools use the College Board's so-called institutional methodology for doling out aid. That gives them the option of applying a cost of living adjustment to the family's expected contribution.
For example, a family earning $80,000 in Manhattan would probably be expected to come up with about 10 percent less than the same family if it lived in upstate New York, says Myra Smith, executive director for financial aid services at the College Board.
To figure out whether schools you are interested in offer that adjustment, and how big it is, use the net cost of attendance calculator that schools now put on their websites. Put in different zip codes and see if the net costs and typical aid packages differ, and by how much.
* Appeal aid packages. Smith also suggests that parents in pricey neighborhoods appeal financial aid packages that won't work for them. "Schools can often adjust aid on a case-by-case basis," says Smith. Present the loan officer with a desk full of high-dollar receipts for commuting costs or health insurance, and you may be able to win a better deal.
* Buy a vacation home instead of a first home. This is not an unusual strategy in Manhattan, where even small apartments may be unaffordable to buy, but weekend homes near the Pennsylvania mountains or Jersey shore may be priced significantly lower.
* Invest in less - or more - expensive areas. That's tricky, because the same price-depressed market that may open up an investment opportunity to you could also be signaling risks and local troubles. So don't assume that just because a place is affordable it is a bargain.
* Consider holding on to your home if you move from an expensive to a cheaper area. People who leave San Francisco for a short stint in New Mexico, for example, have a tough time regaining their place in the San Francisco market. Rent out your costlier place for a year or two instead of selling it, just to make sure you don't want to go back.
* Negotiate hard if you're asked to move to a pricey place. You don't really know how hard local baby sitting or trash collection costs will hit you until you experience them. If you're considering a move to a major city like Boston or Los Angeles from a small midwestern community, for example, make sure the job comes with the kind of differential that will such a move worthwhile.
* Retire to a cheaper area. Many people spend their child-rearing years in costly neighborhoods, because they value the schools or proximity to good jobs. But once the kids grow up and the parents retire, those priorities change. In addition to cost of living disparities are income tax disparities; a person who spent a lifetime building up a tax-deferred retirement account in a high-tax state can make their money last significantly longer if they move to a less expensive and lower tax state when it's time to make withdrawals. And that's why one generation after another ends up in Florida, even though they say they never will.
(The last sentence of the second paragraph has been corrected to add words deleted in editing)
(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at firstname.lastname@example.org; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Steve Orlofsky)
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