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Poverty Level

A level of income that is not sufficient to purchase basic necessities

What is the Poverty Level?

The poverty level is also known as the federal poverty level. It is an economic measure used by government agencies to determine if an individual or family’s income is eligible for certain federal subsidies and benefits. It is issued by the U.S. Department of Health and Human Services (DHHS) every year in January, and it uses the household size and income to determine an individual or family’s poverty level.

 

Poverty Level

 

The figure shows the total cost that each person in the household needs each year to cover basic necessities like utilities, food, clothing, shelter, and transportation. The DHHS sets the poverty levels for the 48 contiguous US states, and separate indicators for the state of Alaska and Hawaii. Some of the programs whose eligibility is measured using the federal poverty levels include Medicaid, the Children’s Health Insurance Program, Marketplace health insurance, and other federal programs.

 

Programs that Use the Federal Poverty Level

The following are some of the government-backed programs that use the poverty level information to determine the eligibility of households to access the benefits:

 

1. Supplemental Nutrition Assistance Program (SNAP)

The Supplemental Nutrition Assistance Program (SNAP), formerly referred to as the Food Stamp Program, is available to families that earn 130%  and below the federal poverty level. It means that, for a three-member family, 130% of the poverty line is $2,213 a month and $26,600 annually. Households with an elderly or disabled person must own less than $3,500 in assets, while families without an elderly or disabled member must own $2,250 or less in assets. The net income after deductions should be at or below the poverty level. Poverty levels are lower for small families and higher for large families.

 

2. Medicaid and Affordable Care Act

Medicaid is the single largest source of health coverage in the US, and it covers children, parents, elderly, and individuals with disabilities. It is available to children up to and below 138% of the federal poverty level in every state. On the other hand, the Affordable Care Act provides low-cost insurance to households with between 138% to 400% of the poverty level.

 

3. Children’s Health Insurance Program (CHIP)

The Children’s Health Insurance Program (CHIP) provides insurance coverage to children up to 19 years in families whose annual incomes are too high to qualify for Medicaid, and insufficient to pay for private insurance coverage. It covers children with 200% and above of the poverty level in 46 US states and the District of Columbia. Each state imposes different rules on the categories of people that qualify for this insurance program.

Other programs that use the poverty level information include the Home Energy Assistance Program, the National School Lunch Program, and the Emergency Shelter Grant.

 

Federal Poverty Guidelines Chart 2018

The Department of Health and Human Services uses the term “poverty guidelines” in place of “poverty level,” but the two terms mean the same thing. The guidelines show the total cost that a family needs to cover the basic necessities, such as food, shelter, and utilities. The number is adjusted every year in January to include the effects of inflation. The 2018 Federal Poverty Guidelines are as follows:

 

Number of people in the household48 States & D.C.AlaskaHawaii
1 $12,140 $15,180$13,960
2$16,460 $20,580$18,930
3 $20,780$25,980 $23,900
4 $25,100$31,380$28,870
5 $29,420$36,780$33,840
6$33,740$42,180 $38,810
7$38,060  $47,580$43,780
8 $42,380$52,980  $48,750

 

For every additional member above eight, add $4,320, $5,400, and $4,970 for the 48 states and DC, Alaska, and Hawaii, respectively.

 

How the Poverty Level works

The federal poverty level is measured based on the annual family income, size of the family, and geographical location. When determining whether a family is eligible to receive a subsidy or other benefits, the respective agencies can either use the income before tax or income after tax. Other than the income, the government agency may use a family’s annual consumption, total wealth, or other indicators that measure a person’s well-being.

When calculating a family’s poverty level, the annual income is divided by the poverty guideline and then multiplied by 100. For example, take a family of five living in Washington DC and with an annual income of $100,000. The poverty level for this family will be calculated as follows: ($100,000/$29, 420) x 100= 339%.

The family’s poverty level of 339% makes it eligible for the premium tax credit on Health Insurance Marketplace. However, the family is not eligible for Medicaid and the Supplemental Nutrition Assistance Program.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Monetary Policy
  • Purchasing Power Parity
  • Remuneration
  • Structural Unemployment

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!