Tax Preparation vs. Tax Planning

Oct 8, 2019 | Newsletter

Tax Preparation vs. Tax Planning

Many people assume tax planning is the same as tax preparation but the two are actually quite different. Let’s take a closer look:

What is Tax Preparation?

Tax preparation is the process of preparing and filing a tax return. Generally, it is a one-time event that culminates in signing your return and finding out whether you owe the IRS money or will be receiving a refund.

For most people, tax preparation involves one or two trips to your accountant (CPA), generally around tax time (i.e., between January and April), to hand over any financial documents necessary to prepare your return and then to sign your return. They will also make sure any tax reporting on your return complies with federal and state tax law.

Alternately, Individual taxpayers might use an enrolled agent, attorney, or a tax preparer who doesn’t necessarily have a professional credential. For simple returns, some individuals prepare and file their own tax forms with the IRS. No matter who prepares your tax return, however, you expect them to be trustworthy (you will be entrusting them with your personal financial details), skilled in tax preparation and to accurately file your income tax return in a timely manner.

What is Tax Planning?

Tax planning is a year-round process (as opposed to a seasonal event) and is a separate service from tax preparation. Both individuals and business owners can take advantage of tax planning services, which are typically performed by a CPA and accounting firm with in-depth experience and knowledge of tax law, rather than a tax preparer.

Examples of tax planning include bunching expenses (e.g., medical) to maximize deductions, how to use tax-loss harvesting to offset investment gains, increasing retirement plan contributions to defer income, and best timing for capital expenditures to reap the tax benefits. Good recordkeeping is also an important part of tax planning and makes it easier to pay quarterly estimated taxes, for example, or prepare tax returns the following year.

Tax planning is something that most taxpayers do not take advantage of – but should – because it can help minimize their tax liability on next year’s tax return by planning ahead. While it may mean spending more time with an accountant, say quarterly or even monthly, the tax benefit is usually worth it. By reviewing past returns an accountant will have a more clear picture of what can be done this year to save money on next year’s tax return.

If you’re ready to learn more about what strategies you can use to reduce your tax bill next year, help is just a phone call away.

Tax Season Is Long Over, but Tax Scams Are Thriving

Tax Season Is Long Over, but Tax Scams Are Thriving

The IRS is warning taxpayers about emails and text messages that promise refunds and credits, but that actually result in identity theft. Many current schemes involve the third Economic Impact Payment (originally made in 2021). Messages may also reference the Employee...

An “Innocent Spouse” May Be Able to Escape Tax Liability

An “Innocent Spouse” May Be Able to Escape Tax Liability

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. That means the IRS can pursue either spouse to collect the entire tax, not just the part that’s attributed to one...

Tax Implications to Be Aware of After a Job Loss

Tax Implications to Be Aware of After a Job Loss

Despite the generally robust job market, some people are still losing their jobs. If you’re laid off or terminated from employment, taxes are probably the last thing on your mind. However, you may face tax implications due to your changed personal and professional...

Buy-Sell agreements Require Careful Planning

Buy-Sell agreements Require Careful Planning

Does your business have multiple owners? If so, you need a buy-sell agreement. This type of binding contract determines how (and at what price) ownership shares of a privately held business will change hands should an owner depart. There are also potential tax...