The Median Income After Taxes: An Insightful Measure

When discussing income levels in the United States, it's crucial to understand the difference between mean (average) and median income after taxes. This distinction is particularly important as it provides a more accurate picture of the typical household's financial situation. Unlike the mean, which can be skewed by high earner outliers, the median provides a more representative snapshot of the middle ground.

Mean vs. Median: A Simple Example

The practical difference between mean and median income can be illustrated with a simple example. Imagine a small neighborhood consisting of eleven houses: ten houses are valued at $100,000 each, and one grand house is valued at $1,000,000. Let's break this down:

The mean value of the 11 houses is $182,000. This represents the average value, which is heavily influenced by the grand house's high value. The median value of the 11 houses is $100,000. This is the value of the house in the middle when all houses are lined up in order of value.

For a prospective home buyer, the median value is more useful as it provides a better representation of the typical house value in this neighborhood, whereas the mean value is not as representative due to the outlier.

Employment Sectors and Average Income

Across various employment sectors, each comes with an average income. However, lumping all employment sectors into one broad statistic is misleading. For instance, government-supplemental payouts for certain life events can be factored in, but they should not be the sole basis for determining one's financial needs. The median income can be a more practical benchmark for understanding financial sufficiency.

Personal Experience and Financial Freedom

I've personally used the median income as a baseline to avoid government supplements and achieve financial independence. For a single person in 2024, the median income is $58,320 per year, which equates to about 200% of the US Federal Poverty Level (FPL). Since age 45, my goal has been to target making around 200% of the US FPL, which has allowed me to become "financially free" at approximately age 45. My strategy involves a combination of income, investments, and household management to minimize reliance on welfare or old-age benefits.

Taxation and Financial Independence

When considering tax obligations, the percentage of income paid in total (not just income) taxes varies depending on your income and how much you earn. For individuals who achieve a certain level of income from investments held at the household level, the tax rate can drop significantly. For example, I aim to pay around 20% of my total earnings in taxes, while 'normal' employed individuals often pay around 33% of their earned and investment income in total taxes. Achieving financial independence means more household management but greater freedom once the net worth reaches that of the middle class.

Complexity of Calculating Average Income After Taxes

Calculating an accurate average income after taxes is complex due to the wide variability in income levels and tax rates. Progressive taxation systems further complicate matters. For example, take a scenario with different groups of people with varying incomes and taxes paid:

10 people make $50,000 and pay $20,000 in taxes. 25 people make $50,000 and pay $10,000 in taxes. 20 people make $55,000 and pay $25,000 in taxes. 10 people make $40,000 and pay no taxes. 10 people make $40,000 and pay $10,000 in taxes. 4 people make $100,000 and pay $30,000 in taxes. 1 person makes $250,000 and pays $35,000 in taxes. 20 people make $20,000 and pay no taxes.

Multiplying these figures gives an average income of $47,000 and taxes of $12,000. However, this average is misleading as it does not reflect the true financial situation of the individuals involved. Progressive tax systems further complicate this issue, as different income levels and sources are taxed at different rates.

Conclusion

The term 'average income after taxes' is often imprecise and may not truly represent the typical household's financial situation. The median income, on the other hand, provides a more realistic and representative measure. By focusing on median income, individuals and policymakers can better understand and address the actual financial needs of households in different sectors and economic conditions.