The setting of "The Gift of the Magi"

The events primarily take place in the characters' flat. O. Henry describes the apartment where Jim and Delia live.The description is detailed but not to make the reader take pity on the characters, but  understand the great sacrifices Delia and Jim made. The capitalization in the first line is used to show how difficult financial situation in the family is ONE DOLLAR AND EIGHTY-SEVEN CENTS. THAT WAS ALL. AND SIXTY CENTS of it was in pennies.
Such epithets as shabby couch, beggar description and mendicancy squad are used to underline that the flat is cheap and poorly furnished, but they are happy living there because their feelings are true and they make that flat pleasant and brighter for them. To show how Jim is important for Delia, the author uses a possessive pronoun before proper name - Only $1.87 to buy a present for Jim. Her Jim. 

The mood of the story is sad and disappointed, it is proved by the repetition of grey  -  a grey cat walking a grey fence in a grey backyard. From the color symbolism I got to know that "Gray can stifle and depress energy but it is also the stable base from which the new and positive can come". It means that in spite of all difficulties, miracle will come.

The events take place just on Christmas Eve, that makes story in some cases mysterious because everyone expects the miracle. And everyone prepares gifts to the close, Jim and Delia did the same in spite of their small income. The strong Delia's desire to make her husband happy and to present him a gift is underlined by the use of an indefinite article 'a' after an adverb 'many'  - Many a happy hour she had spent planning for something nice for him. 

The setting of “Gift of the Magi” likely reflects O. Henry’s location at the time in New York City. In 1906, New York was still a shipping city, bustling and packed. There were no skyscrapers yet, and South Street was still an important commercial district rather than the tourist attraction it would become by the end of the century.