Finance
How to minimize one and max the other.
By Dawn Dahlby
February 7, 2022
Photo courtesy of Karolina Grabowska via Pexels
Falling in love with your taxes can seem like a bit of a pipe dream, am I right?
And while paying taxes will likely never be fun, it can be simplified to reduce stress on your part AND minimize your tax bills each year. And really, what could be a better Valentine’s gift to your spouse than saving money on taxes (and spending a little bit more on them instead!)?
Taxes are likely the biggest expense you will have throughout your entire life, and the key to properly managing them is to balance your income and your investments. The second biggest expense is probably what you spend on yourself and your significant other in order to maintain your current lifestyle. Only when both are working together in harmony, can you maximize your wealth. These pieces are just like any relationship—there have to be boundaries, as well as open communication, in order to create a successful balance.
One of the biggest pieces of advice that I give my clients is to properly divide assets in order to receive the most benefits.
Approximately 30 percent of your investments should be found in non-IRA accounts, like brokerage or savings accounts. This isn’t the most lucrative option, however, when that piece of your investment portfolio is in a non-qualified, or non-IRA, account, it is eligible for capital gain tax, rather than being subjected to income tax, which is higher.
Moving on from there, the next 40 percent of investable assets should be found in tax-deferred accounts, such as a 401(k). You can save tax money today, by deferring it for the future when you need to access the funds. While it may not change the fact that you still have to pay taxes on it, it can certainly make a difference in your tax bill this year!
The final 30 percent should be in tax-free accounts, such as Roth IRAs. This money has already been taxed, but when it is accessed later during retirement, it will not be taxed again. There are a few scenarios in which these numbers may vary, but they hold true for the majority of my clients.
And finally, you should NEVER receive a tax refund of more than $1,000. If you do, you are giving an interest free loan to the government and that money could have been collecting interest in one of the above accounts for the entire year. Make adjustments to your withholdings if you are currently receiving a tax return of more than $1,000. Trust me, your future self will thank you!
OK, so now that we’re saving money on our tax bills, let’s look at how we can use the extra cash to better your relationship with your money and your significant other, because it is love month!
When it comes to relationships and money, I’ve learned the most important factor is to figure out what your top five core values are. You and your spouse may have completely different values—and that’s OK! But if you put aside 25 percent of your real net income* for guilt-free spending on those core values, it can remove tension or miscommunications about who’s spending what in certain areas. You will both feel more understood when your needs are being met right at the center of who you are…that is true love!
Taxes and relationships don’t seem to go together on the surface, but the truth is, both require time, energy and patience in order to truly reap the benefits. There will certainly be a learning curve, but working through your tax bill and freeing up funds for guilt-free spending today will make a huge difference in your relationship this year!
* Dawn Dahlby’s definition of real net income = your income after taxes and savings.
Dawn is a Certified Financial Planner, the country’s first Behavioral Financial Advisor, the Founder and President of Relevé Financial Group, a multimillion-dollar advisory firm, and the creator of the Live WELLthy education and financial planning platform. As a fiduciary with over 20 years of experience providing financial advice, she teaches people to save for tomorrow without having to sacrifice living today. Dawn’s proprietary process helps people identify what they want out of life, and she provides proven tools so people can get the money to make it happen. Her unique approach seamlessly merges the most effective teachings of self-help and finance, alleviating financial anxiety by ensuring people have spending freedom today and tomorrow.
