When we look at tax planning vs tax preparation, there really is no contest. That’s because it’s not a competition. It’s just smart to do both. They help you accomplish two very different goals.
Tax preparation is about last year.
Tax planning is for the future.
Proactive tax planning services are the secret to getting the most for your money. Without it, you’re probably overpaying on your taxes. When you meet with a tax advisor before the end of the year, you can pick the best time to make big purchases, make tax-deferred investments, and minimize what you’ll owe in the spring.
Tax Preparation: Just Compliance after the Year Ends
Tax preparation is about one thing, and one thing only: making sure you pay any taxes due for last year.
You hand off your documents to your tax preparer, either an accountant, CPA or IRS Enrolled Agent (EA), and they tell you how much you owe, or how much you overpaid.
If you need to pay more taxes, you pay what’s due or make payment arrangements. You sign your tax return, and your tax prepare files it. They keep track of the deadlines, the IRS requirements and filing process, and any changes in the tax laws that can affect you. If you have to file state taxes, an accountant can help you with that, too.
It’s all pretty straightforward. Maybe not pleasant, but straightforward, at least, from an accounting standpoint.
But tax planning is altogether different. The right tax advisor can help you meet your financial goals so much faster. Maximizing your tax benefits can be one of the best financial decisions you ever make.
What Is Tax Planning? Develop Your Strategy Before the Year Ends
Tax planning is proactive. It’s what you do before the end of the year, so you can maximize your tax benefits and avoid paying more taxes than you have to.
If you have a business, that could mean determining the best time to make big purchases, either this year, or in the next. Proactive tax planning is all about looking forward.
Tax planning can help you save you a lot of money, especially if:
- You’re planning a large purchase for your business
- You’re planning to scale your business, and need advice on timing
- You’re planning to start a new business, and need advice on timing
- You’re considering restructuring/changing entity types
- You expect equity compensation, and want to minimize taxes on it
- You pay quarterly business taxes, and need advice on timing for the best tax treatment
- You want expert help for timing of other income and deductions
Tax Planning vs. Tax Preparation and When You Need Them
Proactive Tax Planning vs. Retroactive Tax Preparation
The time to think about tax planning is not April, or even March. November is when you can look at what you’ve done for the year, estimate December and make a plan. March is often too late. Proactive tax planning takes stock of where you are, and where you want to be.
If you expect to receive stock options from your employer in the next year, or if you already have them and don’t know when vesting occurs, you need to plan for that now. Otherwise, you could have a surprise tax bill in your future.
If you have a business, you may buy new equipment whenever something breaks. But with proactive tax planning, you can save so much money. Your tax advisor can help you determine the best time to buy and sell old equipment. It’s just one way they can help you save.
Equity Compensation
If you receive stock options as part of your employee compensation, you want to know when you’ll owe taxes on your options, and how to minimize what you owe.
For example, if you own restricted stock units (RSUs), they may be taxed as ordinary income until vesting (the date when you are allowed to sell them). You may receive them on certain anniversary dates of your employment, or on a regular basis, i.e., monthly, quarterly or annually.
If your employer doesn’t withhold enough to cover your taxes due, you could end up owing taxes on them, even if you haven’t sold them.
Your tax advisor may advise you to sell your stock options as soon as they’re vested. If you aren’t proactive in doing this, you could get a nasty surprise at tax time, when the taxes come due, and it’s too late to do anything about it.
Proactive tax planning is the secret here. Tax planning services can help you understand the types of equity you receive from your employer, and how to make the most of those investments. Your ROI won’t look nearly as good if you overpay in taxes on that equity.
Rental Property Income
If you own rental property, tax planning can help you save money on your income taxes when you:
- Plan for the best deductions at tax time
- Track certain rental expenses throughout the year
- Get the best tax treatment for short-term (vacation) rentals
- Utilize short-term depreciation strategies and segregate costs
- Reduce capital gains taxes due when you sell your rental
Planning on a Quarterly Basis
If you have complex tax returns with multiple sources of income, you may get the most benefit from meeting with your tax advisor to discuss proactive strategy once every quarter (or more). That way, you’re never learning about strategies after it’s already too late to use them.
Your tax advisor becomes part of your team, and you meet with them regularly to stay on track. These meetings can be in-person at a local office, or conducted over the phone or video. Regular check-ins ensure you’re both on the same page, and help you meet your goals faster, and with less confusion.
Do You Need a Tax Advisor, a Tax Preparer, or Both?
You may need a tax advisor and a tax preparer if you want to minimize taxes due and plan for the future. There are so many deductions and benefits you might not even know about, and if you don’t find out until tax time, it’s often too late to take advantage.
Having a solid plan throughout the year is how businesses make sure they don’t overpay on any taxes - federal, state, local ordinary income, capital gains or other tax types. Professional tax advisors stay on top of the constant changes in tax law.
If you don’t think about taxes until tax time, and leave everything up to a tax preparer you see once a year, you’re probably leaving money on the table. Pair expert financial planning with solid tax advice to save the most money. Invest and grow those savings over time in your business, or toward your own personal wealth and the wealth of future generations.
This is the secret most people don’t know about. Don’t be one of them.
Tax Planning vs Tax Preparation: Frequently Asked Questions
Is tax planning the same as tax preparation?
Tax planning is not the same as tax preparation. Tax planning is proactive. It’s what you do to save money in the future. Tax preparation is completely different. It’s about making sure you pay any taxes you owe, on time, for the income you made last year. It’s important, but you save the real money when you work with a tax advisor throughout the year, not just at tax time.
Do I need tax planning if my taxes are simple?
Even if your taxes are simple, you could be paying more in taxes than you have to. Tax planning shows you the best deductions to take, the kind you need to plan for throughout the year. It helps you plan large purchases at just the right time, and avoid surprise tax bills. Proactive tax planning is the best way to maximize your income and take advantage of any tax programs that can help you save.
When should I start tax planning for this year?
Yesterday! You should start tax planning as soon as possible, especially if you own a business or have multiple sources of income. Proactive tax planning is the only way to time your decisions for maximum tax savings.
Can the same person do both?
The same person may do both, but not always. The best proactive tax planning and advice comes from a dedicated accountant, IRS Enrolled Agent (EA) or CPA who spends a significant amount of time focused on tax planning. That’s someone who works year-round, not just at tax time, and can offer to meet with you on a quarterly basis. Meeting with your tax planner before the end of the calendar year is crucial.
Don’t Just File Your Taxes. Plan Ahead.
No one has ever regretted strategic tax planning. If you still have questions regarding the differences between tax planning vs tax preparation, we’re ready to answer them.
Request a FREE quote with one of our expert tax consultants today, and start planning your future.