The following is a guest post by Financial Samurai reader Tony who believes financial dependence is the worst and that the best thing we can do for our husbands or wives is to make them independently wealthy.
Back when I was working in finance, I became perturbed at my ever increasing tax bill. It didn't make sense to work more and more to get paid less and less for every incremental dollar earned.
Working 70 hours a week wasn't fun, but I knew it had to be done if I wanted to get paid, promoted, and eventually retire early. So that's what I did and paid my six figure annual tax bill like a good American.
When California voted on a retroactive 2-4% additional tax on those who made more than $200,000 a year in 2011, I knew I had to take things down a notch. I didn't mind so much that I was paying even more taxes. I was just disappointed the bill to help raise education money for our children didn't pass the first time around when everybody had to chip in.
Isn't raising $8B from everybody better for our children than only raising $2.5B from a few? It's not like only people who make over $200K have kids.
If it wasn't for arbitrary laws that decide who gets a tax credit and who gets to pay more, I doubt I would have ever retired at 40. A flat tax after a certain minimum income level would have kept me in the rat race for at least a decade more!
So I want to formally thank citizens who've voted to raise taxes on other citizens without having to pay more taxes themselves. Without you, I wouldn't have the freedom I enjoy today.
Love And Taxes Hurt
Now that I make less than what government officials consider to be rich, it feels AMAZING to be a part of the majority again. I faced various encounters of discrimination growing up as a black person in North Carolina for high school and college.
I'll never forget one time I took my girlfriend to Denny's for a late night milkshake and lemon meringue pie after a movie. Four white offensive lineman sat in the booth next to us and started calling us racial slurs. Then they told us to get the fuck out or else they'd kick our asses.
All I wanted to do was get my fork one of the guy's eyes out for disrespecting my girl and dishonoring our race. Even if they kicked the shit out of me, I would have at least severely wounded one of them. How do you keep your starting job without being able to see? But I had already gotten in trouble in high school and I knew that if I ever wanted to get a job after college, I had to behave. So we left.
I will do anything for the woman I love. At the same time, my eyes are wide open by how much the government discriminates against women, gays, transgender, minorities, and people of different income groups. It's understandable because our politicians aren't very diverse. I wish we could all be treated the same, but we can't. Therefore, for those of you who feel there's something wrong, DO SOMETHING ABOUT IT.
It is wrong to penalize a couple for getting married with the marriage penalty tax. It made me mad that if I were to propose to the woman I loved, I'd have to pay $15,000 – $20,000 more in taxes a year. We could use that money to pay down a mortgage, go on a nice vacation, help our parents, or donate to various charities.
Why the hell does the government believe that in a marriage, one spouse needs to stay at home and give up his/her career to take care of children they may or may not have? The government should allow two people to go after their career dreams without penalty.
The other baffling thing about the government is that they take away a full $750,000 in mortgage interest indebtedness if you get married.
Let's say Bob owns a home with a $750,000 mortgage and gets to deduct $25,000 a year in mortgage interest from his income as a 5/1 ARM holder. He meets Lindsay who also owns a home with a $750,000 mortgage and gets to deduct $35,000 in mortgage interest from her income as a 30-year fixed holder.
Their total mortgage interest deduction is $60,000. But if they get married, they can only deduct at most $35,000 in mortgage interest from their combined income, even if Bob decided to live in his existing home or keep it as their second home.
We can debate about the merits of the mortgage interest deduction policy. But what I'm saying is that getting married penalizes two higher income earning people and pushes one to give up his or her career to earn less or be a homemaker. The government shouldn't enact different tax policies to sway the people to do something with their personal lives.
Solution To Paying Less Taxes
If you're a higher income earner who plans to marry another higher income earner, the solution to pay less taxes is to simply not get legally married. You can still do the ceremony and throw a party and all as we did, but we never signed the documents in City Hall.
As a result, we've been able to save roughly $120,000 – $160,000 in taxes since 2008, and more like $220,000 – $300,000 since we've known each other and could have legally got legally married.
So ask yourself this. Would you be willing to live together and love each other without government oversight AND get a $300,000 after tax check from them for this freedom? We decided hell yeah we would. Paying an extra $20,000 a year to the government just to live our lives with less freedom is stupid.
Now I'm sure many women out there would never agree to not get legally married if she is going to dedicate her life to another man. I totally get the need for security. But come on, I'm a handsome buck who can always make a woman laugh! Yes, even after the ceremony, the rings, the party, and the pictures, there's not much legal security for either spouse. So here's what I did.
The first thing I did was pay off about $11,000 of my wife's student loans. After all, we were one team now and I had just paid off my MBA loans recently. Then I did a whole bunch of other stuff to demonstrate to her it is the government and not her for the reason why I don't want to get legally married.
Then I did something which I think was the most significant gesture to prove my intentions. I told her to start a company that gave her 100% ownership and also 100% ownership of all the web properties I own.
From 2009 – 2012, all income generated from my sites either went to her or to charity. It wasn't until mid-2013 did I start drawing a salary as an employee of her firm because the revenue started exploding upwards and now she was making too much money from her day job and her company.
The ideal income per person for maximum happiness and maximum deductions is around $200,000 – $250,000 a year. Any income she made over $250,000 would start going to me. In other words, our ideal combined income and tax scenario would be if she made $250,000 and I made $250,000 as her employee as single tax filers. We'd be able to both deduct our mortgage interest and minimize our tax liability by up to $20,000.
Meanwhile, as an employee of my wife's business and not an owner, she is able to contribute 25% of my salary in a SEP IRA while I can contribute up to $53,000 in a solo-401k based on any freelance income I earn. I could conceivably put away over $100,000 in tax-free retirement savings every year compared to just $18,000 a year as a regular employee.
Make Your Spouse A Multi-Millionaire
I told my wife before we were married, and after I had achieved a seven figure net worth milestone that I planned to make her a millionaire as well. I've seen too many divorces where the wife ended up in turmoil because she sacrificed her career for her husband and family. By helping make my spouse independently wealthy, no matter what happens to us, she will always be fine.
I knew that her heart wasn't in her job. But at the same time, I didn't want her to just quit in her early 30s and live off me and her savings so far. She already had solid financial fundamentals to become a millionaire herself. I just wanted to help expedite the process since it wasn't as fun being an early retiree while she was working. Also, I knew how much more awesome life was being your own boss.
At the same time, we both wanted her to see how far she could go in her career and then engineer her layoff with a nice severance package. So she basically followed my game plan of working off hours on her web business as the CFO and COO to see if this was something she'd like to do after Corporate America. She loved it, and by working extra hours at her day job and her business, she really appreciates the freedom she has now.
Giving 100% ownership of the website I built to my wife was my way of telling her not to worry. I remember when we hired a lawyer to help incorporate the business, he asked whether I was sure I wanted to do this. I told him “absolutely” and we put things in motion.
So in a sense, everything I've done to grow my website is due to my love for her. The more I could grow my website, the more she and her parents would never have to worry about money again.
My first goal was to make my website significant enough for her to leave her job. Thankfully, she finally did in early 2019 and so far, she's been the best boss I could ever hope for! Now my main goal is to ensure that we are both happy with our lifestyles.
What Could Go Wrong?
Everything we do is a leap of faith. My wife could easily leave me, fire me, and take 100% of my website away because I'm just an employee, and not an owner. That would be sad, but I would find solace knowing that I had a good five year run.
Her cutting me out of my own website doesn't mean I can't continue to do what I love, which is to write and connect with people online. I'd simply start another site because it's so cheap and easy to do!
Again, I don't live off my website's salary because I have my passive income streams from property, dividends, interest, and capital returns. I've always written primarily for the joy of writing. It's also super fun to experiment with new business opportunities. The salary I draw from my wife's company is to help lower her taxable income and make things legitimate as a key employee of her business.
Proving Your Love Is Simple
So there you have it. To prove to someone you love them and to not pay a marriage penalty tax you've got to do the following things:
1) Calculate how much more in taxes you'll have to pay to legally get married
2) Start a business and give your spouse 100% ownership and have her hire you as an employee
3) Grow your business to the point it can provide a livable income stream
4) Figure out an optimal combination of business income, day job income, and consulting income that makes you happy.
5) Try to distribute the revenue as equally as possible to lower your combined taxable income. If you have a friend, parent, or relative you want to take care of, you can also pay them to do work for you as well.
The key really is to be selfless and think about the bigger picture. I've been fortunate enough to get a job after college that allowed me to kill myself for the chance of early financial freedom.
The financial freedom allowed me to pursue an entrepreneurial dream I've had since middle school. Now I'm just paying my good fortune forward to the people I care about the most.
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There is no rewind button in life, so you might as well do the best you can now to make sure your finances are in good shape in the future.