Apr 16, 2024

When Optimizing Your Tax Spend Comes at a Price

Apr 16, 2024
Chris Missirlian – CFP®
Associate Wealth Architect
People dislike taxes. It’s a cost that no one really wants to bear. As a financial advisor with a specialty in tax planning, I have a real appreciation for tax optimization strategies. From retirement income planning to charitable contributions via Donor Advised Funds, I love finding various avenues through which clients can make the most of their assets and relieve some of the tax burden. However, everything in moderation. There is a point, I’ve seen, where tax optimization yields diminishing returns, no longer serving the individual’s best interests.

It’s natural for people, particularly those with assets with considerable gains, to feel an emotional attachment to their net worth. But the issue is when they become more focused on the negative reinforcement of not paying as much tax, than the positive reinforcement of actively using and enjoying the resources they have. It’s great when you can save significant amounts on your taxes, but you don’t want to let it dictate how you live your life. 

If I see a client start to slip into this territory where they’re artificially constraining themself and making unnecessary sacrifices just to pay less taxes, I try to direct them toward a mindset shift.

THE WHY

When a purchase or payout is big, so too can be the taxes that come with it and this can cause a lot of discomfort for people. When a client is extremely averse to tax spend – to the point of rolling back life expenditures to avoid it – I want to understand why they’re stuck.

For some, it’s about politics; they simply don’t like the idea of giving money to a government administration they don’t support. Others have told me they’re uncomfortable with the idea of this vague entity taking the money they’ve worked hard for and putting it toward causes they don’t necessarily believe in. And what I’ve seen most is that many have an unfounded sense that they can’t afford to pay that much in taxes, whether that much is $1,000 or $1 million.

These are fair concerns, but the question I then pose to them is: What are you willing to give up in order to save a little bit more on your taxes?

TAX COST VS. OPPORTUNITY COST

There’s a cost to everything. There’s a financial cost when you buy things and pay taxes and there’s an opportunity cost when you miss out on meaningful life moments and accomplishments. Saving money on taxes and seeing your wealth grow is a gratifying feeling, but living a wealthy life involves putting some of that money toward the things that bring you and others joy, memories, comfort and purpose. It’s about balance and tradeoffs. 

As part of our process with new Wealth Architects clients, we ask them detailed questions about their investment objectives and their life priorities regarding family, finances, philanthropy and their estate. We use this information to develop their financial-life plan with concrete short- and long-term goals. This becomes a playbook for our work together.

While I guide some clients to practice more judicious spending to stay on course with their budget and goals; I actually urge some clients to spend more. This includes those who experience major stock gains. Major gains often come with concentration risk, whereby a single asset or type of asset has an outsized impact on their financial plan. I often urge clients to diversify sooner as opposed to later, especially if they have enough to accomplish their goals. But sometimes their attachment to the idea that it could grow more, or their desire to push paying taxes on it until a more beneficial tax holding period, makes them lean toward holding out – at the risk of losing it altogether.

This is where the financial-life plan can come back into play. I show them exactly what their expressed goals are (buying a house, sending their kids to private school, taking a big family vacation, giving a certain sum to charity, etc.) and how they can get there. It’s a valuable point of reference when a client may be drifting a bit off course.

VALUES ALIGNMENT

Your values drive your behavior. I find that reviewing and visualizing their plan helps clients realign with their values and priorities. They’re reminded that maximum avoidance of tax spend is not one of their life goals. When your time and money aren’t aligned with your values, your behavior becomes disconnected from what you really care about and leads to feelings of discontent and lack of fulfillment.

It’s not uncommon, though, to get caught up in the numbers and conflate financial wealth with a wealthy life. That’s why our firm makes a point to continually distinguish the two and to guide our clients toward decisions that will likely enhance their holistic well-being. Our mission is to help people achieve both the necessary finances and the mindset to reach their goals and live fuller lives.

If you would like to speak with a Wealth Architects advisor about how we can help you reach your financial and personal goals, contact us here. We look forward to connecting with you.


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The information provided in this commentary is intended to be informative and not intended to be advice relative to any investment or portfolio offered through Wealth Architects.  The views expressed in this commentary reflect the opinion of the author based on data available as of the date this article [essay] was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management or other services offered by Wealth Architects.  References incorporated into the report [essay] from third party sources are as of the date specified and are believed to be reliable.  Wealth Architects is not responsible for errors in the third party data.