Many people assume tax planning is the same as tax preparation. An easy mistake to make since they essentially sound the same, but there are huge differences between the two that you should know.
If you’re doing what most people do and preparing your taxes once a year at the end of the season, you are almost certainly missing out on a number of deductions and tax strategies that could be saving you thousands of dollars each year!
Let’s take a closer look at the two and talk about why tax planning is well worth your time.
WHAT IS TAX PREPARATION?
Simply put, tax preparation is the process of preparing and filing a tax return. It’s what the majority of Americans do each year. Tax time approaches, they assemble their documents and drop them off at their accountant and hope for the best.
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 to file their taxes.
For simple returns, some individuals prepare tax returns themselves and file them 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 accurately file your income tax return in a timely manner.
WHAT IS TAX PLANNING?
Tax planning is a year-round process (as opposed to an annual event) and is a separate service from tax preparation. The keyword here is planning.
Tax planning is all about forward-thinking and projecting into the future so you can be proactive and minimize your tax burden.
Both individuals and business owners can take advantage of tax planning services, which are typically performed by a CPA and accounting firm or an Enrolled Agent (EA) with in-depth experience and knowledge of tax law, rather than a tax preparer.
With tax planning, it pays to work with a professional who understands tax law.
Examples of tax planning include the following:
- Tax-loss harvesting to offset investment gains,
- Analyzing retirement options for you and your team
- Looking at overall business growth goals and find tax savings strategies
Good recordkeeping is also an important part of tax planning. Without accurate records, it’s almost impossible to plan for future tax expenses, so part of the planning process is establishing proper records so you and your tax planner can make better decisions.
Good records make it easier to pay quarterly estimated taxes to stay ahead of the curve and prepare tax returns the following year.
Who should be using tax planning vs. tax preparation
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.
Fail to plan and you plan to fail.
If you wait until the end of the year to think about your taxes, personal or business, you will be missing out on opportunities to save money if you had only thought a little bit ahead. By the time tax season comes around, it’s too late to go back in time and fix things.
While it may mean spending more time with an accountant, say quarterly – or even monthly – the tax benefit is usually worth it, especially for service businesses with larger tax liabilities.
By reviewing past returns, a tax planning professional will have a more clear picture of what you can do this year to save money on next year’s tax return.
It’s never too late to plan ahead for the future! If you’re ready to learn how a tax and accounting professional can help you save money on your tax bill this year, click here to find out how we can get a head on your 2023 tax planning!