With the negotiations over the fiscal cliff underway, the debate over what constitutes “rich” is part of the picture. The line that President Obama and his allies in policy have drawn is an income level of $250,000.

Taxes and $250,000

Technically speaking, the line has been drawn there because those in households as married couples making a gross income of $250,000 or more are in the top 2% of taxpayers in the United States. (For single taxpayers, the top 2% level is $200,000 in annual income.)

As a result of this, the $250,000 mark is rather significant for those who are married and filing jointly. When politicians talk about raising taxes on the “richest,” among us, that’s what they are talking about. Marginal rates would rise in the top two brackets, from 33% and 35% to, respectively, 36% and 39.6%.

But that tax increase would only come if the Bush tax cuts aren’t extended for those considered rich (the fiscal cliff actually threatens an end to the Bush era tax cuts, and higher taxes across all income levels). A more general increase is coming for households above the $250,000 threshold: A Medicare surtax on investment income. Starting in 2013, if you make more than $250,000 married filing jointly, you pay an additional 3.8% tax on your investment income.

But are You Really Rich Earning $250,000 a Year?

One of the bones of contention is whether earning $250,000 a year makes you rich. And it’s not as cut and dry as pointing to a dollar amount and saying, “You are rich if you make this much money.” Because the cost of living varies from state to state and from city to city, whether you are rich is relative.

If you make $250,000 a year, and live in a small town in the Midwest, chances are that you are quite rich. The cost of living is relatively low, and your money goes much further. Paying slightly higher taxes probably wouldn’t be a big problem for you, since your cost of living is so low.

Compare that to someone making the same amount of money, but living in a large city in California, or along the East Coast. That same $250,000 doesn’t go nearly as far. Everything, from housing to food to transportation, costs much more. Plus, state and local taxes (particularly property taxes) are often higher in these areas than in more rural areas. An increase in income taxes – along with a possible cap on allowable deductions – could really make a huge difference in the family budget.

Whether $250,000 a year represents a great deal of wealth depends largely on where you are residing, and the expenses that you have. While those earning $250,000 a year might be in the top 2%, that doesn’t take into account the huge difference that actually exists between those in the top 2% and those in the top 1%. Indeed, less than 1% of the population actually makes more than $1 million a year.

The majority of people subject to the tax increases are unlikely to consider themselves “rich,” and could very well find themselves stressed by higher income taxes.

What do you think? What makes someone rich?