What Is Household Income?

Natasha Khullar Relph
Natasha Khullar Relph

Jan 31, 2024

What Is Household Income?

Household income is one measure of economic well-being in the United States. Analysts use the data to track everything from poverty levels to income distribution, while some assistance programs rely on it to qualify applicants. Understanding your household's income is useful when planning to buy real estate while knowing an area's median income might matter to certain real estate investors. 

Learn more about how household income is defined and used to measure financial information.

What Is Household Income?

Household income is the combined amount of money all household members earn past a specific age. Obviously, we don't expect elementary-age children to contribute to a household's wealth. The U.S. Census Bureau has an age threshold of 15 and older. 

The persons that may be included are working adults living under one roof: spouses, working parents, or anyone else in that dwelling unit. A household can also be a single person if they are the only person living in that dwelling unit.

The calculation includes all sources of earnings, including wages from employment, self-employment, dividends from investments, and business profits. The income amounts count even if the people living in the home are unrelated.

What's Included in Measuring Household Income?

In addition to wages and salaries, the calculation could include money received from any pension, retirement, or Social Security benefits, alimony payments, interest or dividends from investments, rental income, unemployment benefits, and child support payments. Disability, unemployment, or welfare payments might also count depending on who's running the study or the program.

Some specific agencies or programs may define household income slightly differently. For example, when studying household income, the Congressional Budget Office includes non-cash income from government benefits and services like the Supplemental Nutrition Assistance Program (SNAP). Some aid programs may deduct specific expenses from the gross income in their measurement. The U.S. Census doesn't include non-cash benefits like health insurance or SNAP.

What's the Difference Between Average and Median Household Income?

You may hear the terms "average household income" and "median household income" used in a report. These numbers can be different even when pulled from the same data set. Understanding the difference provides a clearer picture of an area's wealth.

Average household income takes the total income from a data set and divides it by the number of households in that set. At the household level, if you make $100,000 and your spouse makes $80,000, that's an average household income of $90,000. 

The problem with averages over larger data sets is that a very low or high number can skew the results. Using the example above, let's say you have a college-age student living at home, working part-time, and making $25,000 a year. Now your average household income is $68,333.

Median household income is the middle number in a data set. So, if your set has 25 entries, organize them from lowest to highest, and no. 13 will be the median. Some analysts find the median to be a more accurate representation of wealth. In our three-person household example, $80,000 would be the median household income.

When looking at reports, note that the agencies and studies calculating median household income may exclude households without positive income. This is usually the case when running average household wealth calculations.

What are Other Ways of Measuring Wealth?

In addition to income, other ways of measuring wealth and economic well-being exist. Per capita income is the income per person in the U.S., calculated by dividing the total income for all Americans by the population size.

Another way to measure wealth is family income, the total income earned by family members, regardless of where they live. Anyone related by birth, marriage, or adoption counts in the "family." Add any earnings from any sources, including wages, tips, dividends, investments, and business profits. Divide by the number of family members to find the average family income.

Gross domestic product (GDP) is another way of measuring wealth. GDP measures the value of all goods and services produced in a country within a given time frame. It's essentially income for a country or region, and it's measured in the U.S. annually.

About the U.S. Census Measurements

A common source of income data is published by the U.S. Census. This governmental organization uses two surveys to calculate its numbers.

The Current Population Survey (CPS) is a monthly survey of around 60,000 households in conjunction with the Bureau of Labor Statistics (BLS). It tracks a household for four successive months, takes an eight-month break, and then surveys again for another four months. If you want a national-level income assessment, this study is recommended.

The American Community Survey (ACS) goes out to around 300,000 people each month, and it's the Bureau's largest survey. It's preferred for geographic-level insights on income.

How do Taxes Factor Into Household Income?

The IRS defines household income as the adjusted gross income from your tax return plus any excludible foreign-earned income and tax-exempt interest you receive during the taxable year. It reports this data for each year down to the zip code level.

Certain income items must be included or excluded when calculating income for tax purposes. Wages, earned interest, capital gains, and self-employment income must be reported to the IRS annually on income tax returns. Other inclusions are unemployment compensation, alimony, child support payments, and revenue generated by rental properties. 

Your eligibility for specific government public assistance or needs-based programs often looks at the household income you report to the IRS. However, the qualification could vary based on what is included in their definition of household income. Look at their specific individual income inclusions and exclusions.

How Does my Household Income Compare?

As of 2021, the U.S. Census Bureau estimated the real median household income in the U.S. as $70,784. This figure was down from its peak in 2019 of $72,808 but over $10,000 more from 2012. Clearly, pressures from the pandemic and its subsequent fallout impacted household earning potential.

However, the average household income was $96,955.04. This demonstrates how averages and medians can be vastly different.

Anyone earning $129,550 would be in the 75th percentile, while it takes $212,110 to be in the 90th percentile. To join the 1% club, your annual household income needs to be above $570,003. Around 35.7% of Americans had a six-figure income.

You can also run the calculator by state or city. Maryland reported the highest median household income, followed by New Jersey and Massachusetts. Mississippi, West Virginia, and Arkansas had the lowest median household incomes.

Who Uses Household Income?

Household income is used by the government, economists, and researchers to measure the economic well-being of a population and the region's standard of living.

The U.S. Census Bureau uses household income to publish reports on income and poverty in the nation. This information can help us understand how resources are distributed among different groups in society or compare other states and countries.

The data provide insights into the distribution of wealth, income inequality, and changes in earnings. For instance, the income statistics show that earnings tend to increase with the household's average age until retirement age. After that, its income tends to drop.

Numbers on household income often reflect times of growth and recession, like when the 2020 median household income declined for the first time since 2011.

The government and other organizations rely on an individual's household income level to determine if a person qualifies for need-based programs like nutrition or housing. The HealthCare Marketplace asks for expected household income each month and the year. It creates a modified adjusted gross income (MAGI) to determine your health insurance savings.

In addition, household income can be used when filing taxes. Knowing your number can help determine your income tax bracket, so you accurately estimate your paycheck withholdings or self-employed tax payments.

Lenders use household income to underwrite loans. They estimate how much you can afford to borrow and check if you're at high risk of defaulting on your loan.

What Household Income Says About Our National Wealth

A household's income is among the most important indicators of a nation's economic wealth. When measured against the gross domestic product (GDP,) it assesses how citizens build wealth and if the country's economy is growing. It further provides insights into income inequality and poverty levels in countries worldwide.

When income rises, it indicates that people have more money to spend, which leads to increased consumer demand, production, and economic growth. This can further affect income inequality and disparities between different groups of people across the country.

Household income is an indicator for benchmarking a nation's economic well-being and GDP. Knowing your household income is part of understanding your financial well-being and making informed decisions about how much money to save or invest. 

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