In our world of dual incomes and no kids, smart tax planning will help you build wealth while staying on Uncle Sam’s good side. Nobody wants to pay more than their fair share of taxes, that’s why tax planning plays a crucial role in navigating your financial journey.
For DINK couples, reducing your tax bill, especially if you live in a high tax state, like us here in California, will leave you with more of your money to enjoy life’s luxuries. Let’s dive into some strategies that can help you maximize your tax savings and make your money work smarter.
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Understand Your Marginal Tax Rate
First things first, it’s important to understand your marginal tax rate. In the United States, the federal income tax system is a progressive tax, meaning certain ranges of income are taxed at different rates. Your marginal tax rate is the tax you pay on your highest dollar earned. This is key to leveraging certain tax-saving opportunities. Understanding where your total income lands at that highest tax bracket helps you pinpoint strategies to minimize your taxes.
Maxing Out Retirement Contributions
Here’s where being DINKs can really pay off, retirement savings. With more disposable income, maxing out your retirement contributions is a financial goal you should prioritize. Each year the IRS sets the maximum contribution limit to different types of retirement accounts.
Anyone can contribute to an Individual Retirement Account like a Traditional IRA or Roth IRA, but if you have access to a retirement plan through your employer, like a 401(k) or 403(b), those contribution limits are higher. If you have your own business, that’s even better because you can set up your own 401(k) or a SEP-IRA to really maximize retirement contributions. In addition to securing your financial future, making pre-tax contributions to retirement accounts reduces your taxable income and therefore reduces your taxes. Hence the term “tax deductible contributions”.
Timing is Key for Income and Deductions
Timing your income and tax deductions can be a game-changer. If you own your own business you may have more control over this compared to someone that works for a separate employer. Deferring income to a future year or accelerating deductions to the current year can shift your tax liabilities, potentially saving you a ton in taxes. But tread carefully, this strategy requires some finesse, and guidance from a tax professional can be helpful.
The Difference Between Credits and Deductions
There’s a lot of confusion about the difference between tax credits and tax deductions. The good news is they both reduce how much taxes you’ll ultimately pay. A tax credit is a direct reduction to your tax liability, whereas a tax deduction reduces your taxable income. In other words, a tax credit applies to how much taxes you owe and a tax deduction subtracts from your income before calculating your tax liability.
While DINKs may not benefit from some of the most common tax credits like the child and dependent care credit, there are plenty of others like the earned income tax credit and lifetime learning credit that we may be able to take advantage of. As mentioned above, pre-tax contributions to retirement accounts are one of the best tax deductions. While many filers use the standard deduction, if you itemize your tax deductions you may be able to take advantage of the home office deduction, charitable donation deduction, mortgage interest deduction and more.
Charitable Giving: Good for the Heart and Wallet
Our DINK lifestyle often gives us more room in our budget to be generous with money. Strategic charitable giving not only supports causes that are near and dear to our heart, but also offers tax benefits that are good for your wallet. Donating appreciated assets, like stock, or using a donor advised fund can be a smart way to give back while reducing your taxable income. Another thing to consider, we sometimes accumulate more things than we need in our household. So remember to declutter by donating items that may no longer be useful to you, but could really help someone else.
Keep Track of Business Expenses
For those of us with our own businesses and side hustles, keeping track of business expenses is crucial for tax planning. Even if you are a salaried employee, there may be certain unreimbursed business expenses you should be tracking. Whether or not you have a separate business entity, like a Corporation or LLC, using a separate bank account or credit card exclusively for business spending can be helpful. This way you can keep home office costs, travel expenses, professional development and other business spending organized. Utilizing business deductions like these can help reduce your taxable income and open the door to more tax breaks.
Final Thoughts on Tax Planning
Tax planning should be an ongoing process, not a last minute tax season scramble. With the right strategies in place you can keep more of your hard-earned money and enjoy the financial freedoms that your DINK lifestyle affords. Remember, consulting a tax advisor can provide personalized guidance to navigate the complexities of the tax world.