Tax Planning vs. Tax Preparation

This week, I am going to explain the difference between tax preparation and tax planning, and how to get some real comprehensive tax planning advice.

First of all, you have to understand that tax preparation and tax planning are different. From a professional perspective, they are technically two different services.

Tax preparation is a service that helps you file your tax returns. The main goal is to make sure your tax reporting complies with both federal and state tax laws. This is what we do when we see you in January through April each year. It is a reporting (of course in the most favorable way possible using all the strategies to minimize taxes available) of what happened the prior year. The key here is preparation is looking at what has ALREADY happened.

Tax planning is a service that helps you optimize your tax situation before reporting. The purpose is to use legitimate ways to optimize your potential tax consequences based on your goals and plans for future.

Tax planning can be beneficial before major financial decisions are made – like what will the real tax cost be if I withdraw from my 401K? Is there a more tax-favored way to fund my child’s college or save for retirement? Some of this planning can be done at the time of tax preparation since some deadlines for the prior year are tied to the filing deadlines, but real planning is proactive and happens before decisions and key dates are past.

Tax planning is especially beneficial if you have any kind of pass through income – you own a business either as a sole proprietor, S- Corp or LLC, or even rental properties.

Often, the most beneficial use of tax planning is maximizing the tax benefits and paying the least tax as a family by strategically using deductions and income on the right family members return. This sometimes means shifting income to your kids, but that income can be used for their costs that you are paying anyway (like college!).

Proper planning can even result in a way to write off 100% of medical deduction (without a limitation on income).

These are just some of the ways that proactive tax planning can impact your overall tax burden. Utilizing all the tax laws to minimize your tax is your right, but it does take planning and the strategies and impact are as unique for each individual or family situation.

There are many ways to proactively save on taxes, such as how to use tax loss harvesting to offset your investment gains, how to manage your tax bracket, how to maximize your charitable deduction in a tax-efficient way, when you should do a Roth conversion, what to do with your stock compensations from the tax perspective, what’s the most tax efficient way to take your money out from all your taxable and retirement accounts, how to strategically qualify for a larger mortgage amount or financial aid from the income perspective, and so on.

If you would like to find out if there are ways you could be paying less tax, make sure you schedule a tax planning session – it is definitely the time to set up 2019 to be your Best Year Ever!