How to minimize one and maximize the other.
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Falling in love with your taxes might seem like a bit of a pipe dream, am I right?
And while paying taxes will probably 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 Day gift for your spouse than saving money on taxes (and spending a little more on them instead!)?
Taxes are probably the most important expense you will have throughout your life, and the key to managing them properly is to balance your income and your investments. Probably the second biggest expense is what you spend on yourself and your loved one to maintain your current lifestyle. Only when the two work together in harmony, can you maximize your wealth. These pieces are like any relationship – there must be boundaries, as well as open communication, in order to create a successful balance.
One of the biggest tips I give my clients is to properly allocate assets in order to receive the most benefit.
About 30% of your investments should be in non-IRA accounts, like brokerage accounts or savings accounts. It’s not the most lucrative option, however, when that part of your investment portfolio is in a non-qualified or non-IRA account, it’s eligible for capital gains tax, rather than tax. be subject to income tax, which is higher.
From there, the next 40% of investable assets should be in tax-deferred accounts, such as a 401(k). You can save tax money today, by postponing it for the future when you need to access the funds. While that doesn’t change the fact that you still have to pay taxes, it can definitely make a difference to your tax bill this year!
The 30% of 30% should be in tax-free accounts, such as Roth IRA. This money has already been taxed, but when used later in retirement, it will no longer be taxed. There are a few scenarios where these numbers may vary, but they hold true for the majority of my clients.
And finally, you should never receive a tax refund over $1,000. If you do, you are making an interest-free loan to the government and that money could have been earning interest in any of the above accounts for the whole year. Adjust your deductions if you currently receive a tax return over $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 money to improve your relationship with your money and your loved one, because it’s month of love!
When it comes to relationships and money, I’ve learned that the most important factor is figuring out what your top five core values are. You and your spouse may have completely different values - and that’s okay! But if you set aside 25% of your actual net income* for guilt-free spending on these core values, it can eliminate tensions or misunderstandings about who spends what in certain areas. You will both feel more understood when your needs are met at the center of who you are…that’s true love!
Taxes and relationships don’t seem to go together at first glance, but the truth is that both require time, energy and patience to truly reap the benefits. There will definitely be a learning curve, but working on 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 Nation’s First Behavioral Financial Advisor, Founder and President of Financial Group Statement, a multi-million dollar consulting firm and the creator of the financial education and planning platform Live WELLthy. As a trustee with over 20 years of experience in financial advice, she teaches people how to save for tomorrow without having to sacrifice living today. Dawn’s proprietary process helps people identify what they want in life, and she provides proven tools so people can get the money they need to get there. His unique approach seamlessly merges the most effective teachings of self-help and finance, easing financial anxiety by ensuring people have the freedom to spend today and tomorrow.