Hidden Costs of Living in a High Cost of Living Area

Cost Of Living Expenses Sky High Monitor Showing Increasing Costs
It’s pretty obvious that living in a high cost of living area is expensive. I live in New York City and when I hear about how much a house costs in many other cities, I am pretty envious. My friend, who lives in upstate New York, rents an entire house for $900 splitting the costs with a few roommates. A 500 square foot studio apartment in my neighborhood costs about $1300 and I don’t live in Manhattan or a hip part of Brooklyn. Housing costs are usually the biggest expense but things such as food, entertainment, childcare, and others costs are also higher. Here are two hidden costs of living in a high cost of living area that you may not have thought of.

Taxes

Yes, higher cost of living areas often have higher taxes too. If you live in New York City, you pay a state income tax as well as a city income tax. But I’m not talking about that. There is another tax consequence that you may not realize when you live in a high cost of living area. When you file your taxes, there are credits and deductions for various things such as student loan interest and for having children, however, these credits and deductions phase out and are completely eliminated at certain incomes. Presumably, the reason for the benefit of the tax credit or deduction being cutoff at a certain income limit is because that person makes enough money and the benefit is intended for those making less. This makes sense but when you live in a high cost of living area and your basic living expenses are much higher, you might be cut off from taking advantage of these tax benefits even though you may not be as well off financially as your counterparts living in lower cost of living areas.

Let’s take for an example the student loan tax deduction. The deduction does not take into account where you live nor does it take into account the amount of student loan debt you have. If you live in New York City and have a modified adjusted gross income (MAGI) of over $65,000, the deduction starts to phase out and with a MAGI of $80,000, you will get no deduction. So a person with a MAGI of $80,000 living in NYC with $100,000 in student loan debt will get no benefit from the student loan tax deduction, while someone in let’s say Memphis, Tennessee who makes $63,000 and has $30,000 in student loan debt will get a tax deduction. According to the cost of living calculator on Nerdwallet, you would only need to make $44,798 in Memphis to maintain the same standard of living as someone making $80,000 in New York City. (Note: I input Queens, New York when using the calculator. If I used Manhattan where the cost of living is even higher, someone living in Memphis would only have to earn $30,260 to maintain the same standard of living as someone earning $80,000 in Manhattan.) Check out this site for more information about the student loan deduction as well as the calculator to figure out your tax benefit if you qualify.

The same situation applies to a family with a child who may benefit from the child tax credit. The tax credit starts phasing out for a family with a MAGI of $110,000 and at an MAGI of $140,000 there is no more benefit. A family living in NYC will likely have higher housing costs as well as child care costs. There are a multitude of tax benefits that phase out as your income rises such as the earned income credit and saver’s credit. You also can no longer contribute to a ROTH IRA if you reach a certain income level.

Financial Aid for College

When your child is ready for college and you fill out the financial aid application, your income will be a big factor in the amount of financial aid your child will receive. However, living in a high cost of living area really isn’t taken into account in the determination. According to Edvisor, “generally, every $10,000 increase in parent income will cause about a $3,000 decrease in need-based financial aid.” So in the example above where you could have a similar standard of living making $40,000 less, you would be expected to pay about $12,000 more for college if you live in the higher cost of living area even though the two families may have the same amount of disposable income.

While I understand that where you live is a choice and that higher cost of living areas often have more and better paid job opportunities, I wanted to point out the costs of living in these areas other than the obvious ones. It just cannot be disputed that living in a high cost of living area will affect one’s disposable income, yet this is not taken into account when filing taxes or filing for college financial aid. What are other hidden costs of living in a high cost of living area? Do you think it’s fair that the cost of living is not taken into account?

31 thoughts on “Hidden Costs of Living in a High Cost of Living Area

  1. Kristin

    Really interesting point! I’ve never thought about that, but yeah, your deductions or credits or exemptions phase out more quickly because you technically earn more, even though it’s offset by your super expensive city. Thoughtful post!

    1. livingrichcheaply@gmail.com Post author

      Thanks! I definitely experienced this first hand with the child tax credit when it said that I couldn’t get the full benefit of the credit. I think the NYC metro area is expensive but sometimes I see the cost of housing in parts of California (Silicon Valley/San Francisco) and I’m just shocked at the costs.

  2. DC @ Young Adult Money

    Yeah you make some really good points here. I do think that the opportunities in some of the high cost of living areas outweigh any of the negative impacts. For example I think people in NYC have a lot more opportunities than people elsewhere simply because of all the businesses located in close proximity. But yeah you are right, there are some things that don’t take into account the higher cost of living.
    DC @ Young Adult Money recently posted…7 Strategies to Use to Become a MillionaireMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s true there are more opportunities and there are a lot of jobs that may pay more, but I don’t think the higher salary/opportunity always outweighs the negative impacts financially. The best bet seems to be having a good paying job in a low cost of living area.

      1. DC @ Young Adult Money

        I have to agree. I do think it’s going to be tougher to make that work, though. There is so much salary and cost of living data that bigger companies are always going to adjust based on where you live. I work for a Fortune 20 company and it’s incredible the salary data they have. It makes it “fair” as you get paid more or less based on where you live, but those looking to hack the system and get paid more even though they live in a lower-cost of living area are going to have more issues actually getting a company to agree to it.
        DC @ Young Adult Money recently posted…7 Strategies to Use to Become a MillionaireMy Profile

  3. Tonya@Budget and the Beach

    It definitely would be harder to do what I do in not so populated are popular areas. I really lucked out with a few things that are able to help me make up for lost time financially. I don’t know how I actually lived in LA for so many years on such little money.
    Tonya@Budget and the Beach recently posted…March RecapMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s true and that’s why I’m sometimes envious of those who’s job is not location dependent. It is tough to live in a high cost of living area if your salary doesn’t reflect the high costs.

  4. The Pracitcal Saver

    Those are interesting and pretty on-point hidden costs of living in an area with high cost of living.

    I truly feel the pain of living in such area. I live near the DC area, though I not making a lot of money. It seems like everything costs too much. If I were to live in a place with lower cost of living and my salary is low too, I’d still be saving more money than with high income living in high-cost-of-living area.

    1. livingrichcheaply@gmail.com Post author

      Thanks. Yes, whenever I think of high cost areas in the US, I often think of NYC, certain parts of California, the DC area…and Hawaii. Great point about being able to save more even if making a lower salary in a low cost of living area. I think a lot of people feel that the higher salary offsets the high costs. While there are extremely high paying jobs in NYC, this doesn’t apply to everybody. And the higher salary doesn’t always offset the high costs especially housing. I mean the housing can costs 3 to 4 times more!

  5. Stockbeard

    It’s not news to me that the more I make, the more I feel is taken from me,, but I didn’t directly relate it to living in a HCOL area. Interesting points.
    Interestingly too, for entrepreneurs nowadays it’s doable to have your cake and eat it, living in a Lower cost area while still working from home on high income revenue streams… Think about it!
    Stockbeard recently posted…Procrastinators, Early Retirement was made for you!My Profile

    1. livingrichcheaply@gmail.com Post author

      Geographic arbitrage is awesome. I’d love to be able to have my cake and eat it too!

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  9. James

    Great food for thought. While I travel to high cost of living areas (D.C., Hawaii, Guam, San Francisco, New York) on business and have traveled to others (e.g. San Diego, Chicago) for pleasure, I’ve never thought about or experienced the hidden costs, though intuitively you have a sense that they are there. That is probably part of the reason, subconsciously, I elected to stay in a location with a more moderate cost of living when I retired from the Army.
    James recently posted…Simple Money – A SavvyReviewMy Profile

    1. livingrichcheaply@gmail.com Post author

      Yea, I think you made the right choice to not choose to live in a high cost of living area!

  10. Liz

    You have to weigh in the pros and cons in living in high cost of living area. If renting and other commodities are high, I’d better look for another city to live in. It is really up to the person if the takeaway is good.

    1. livingrichcheaply@gmail.com Post author

      Yea, it depends on each person’s situation. If it wasn’t for close family ties, I’m not sure I would stay.

    1. livingrichcheaply@gmail.com Post author

      Fortunately, I don’t have to worry about college costs for some time. Hopefully tuition prices become more reasonable when the time comes.

  11. Millennial Boss

    I always wondered about that too (how tax deductions/credits don’t take into account COL). I just moved from a low COL to a high COL area and got a salary increase. If I can finagle my way into saving money despite the high COL, I have greater potential to increase net worth faster in the high COL place than if I stayed in the low COL (atleast I’m telling myself that!) The next step is figuring out how to hack housing.
    Millennial Boss recently posted…I Sold My Car!!My Profile

    1. livingrichcheaply@gmail.com Post author

      I think it’s possible to do it, especially if you house hack and you already sold your car so that’s a big savings. House hacking and being without a car is a little tougher when you have a family and kids though =)

    1. livingrichcheaply@gmail.com Post author

      I think NYC is expensive and sometimes when I have about San Francisco and Silicon Valley…I can’t believe how expensive it is!

  12. middle class revolution

    I never understood why taxes / deductions /etc.. do not factor in differences in cost of living. Our income is modest in a HCOLA but we don’t qualify for most income-based programs because the cut-off is the same in our area as it would be in a low cost of living area.

    1. livingrichcheaply@gmail.com Post author

      I guess it would make taxes which are already complicated even more complicated.

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