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What Is The Difference Between Tax Preparation and Tax Planning?

When you think of taxes, what comes to mind?

Is it the rustling of age-old paperwork? Is it the frantic rush to complete all of the necessary tasks by April 15? Is it the frustration of not understanding some steps and simply hoping for the best? 

Welcome to tax time. 

For so many people, taxes signify a mad rush to complete forms by April 15 and hopes of not owing more money to the IRS. 

When people think of taxes, often this is the only picture that comes to their minds, and that process is called tax preparation. 

But taxes are so much more nuanced than a once-per-year formula. The other side of taxes is a process called tax planning. Creating a proper tax planning strategy can be woven into every aspect of your financial plan. This process provides rich depth to your financial plan as each financial move takes into account the tax consequences. 

So what is the difference between tax preparation and tax planning and how can they work together to strengthen your financial plan? Let’s find out!

Tax preparation

Tax preparation is the process of reviewing, filing, and submitting the proper federal and state (and even some city) tax forms to the IRS. During this process, a tax professional ensures that each line of your tax return is in order and complies with the rules and regulations stipulated by the IRS and their state and local equivalents.

Your tax professional will have a deep knowledge of tax law and be an expert in the rules of your tax return. Due to the nature of this process, you will often only see your tax professional once or maybe twice per year. They will be able to make sure all of the i’s are dotted and the t’s are crossed and will be able to answer basic questions you have about your tax paperwork.  But they won’t be able to provide strategic advice to implement an integrated planning and  tax strategy.

You may wonder:  since tax preparers are tax professionals, shouldn’t they be able to also give you strategic advice to maximize your tax strategy? On paper, the answer is yes. But in reality, providing strategic tax advice requires a deeper knowledge of your overall financial picture, something that is nearly impossible to attain a single, often rushed meeting per year. 

Offering proactive tax strategies requires a greater level of detail, security, and personal knowledge of your unique financial situation to get right. With tax “preparation,” you look back on the previous year, whereas with tax “strategies” you are looking forward to the year ahead and future financial actions. 

In other words, tax preparation is focused on the past and tax planning looks toward the future

Tax planning

Tax planning is a comprehensive process that integrates proactive tax strategies into your financial plan. You may be surprised to learn the scope of tax planning and the many areas of your financial plan it touches. Effective tax planning is woven into your

  • Retirement planning and contributions (IRA, Roth conversions, 401k, etc.)

  • Estate planning

  • Charitable giving

  • Tax brackets

  • Tax-loss harvesting

  • Risk tolerance and portfolio management 

This list is merely a snapshot into all of the elements of your financial life that are impacted by taxes. 

Tax planning is an ongoing service and as such is focused on your entire financial picture. It isn’t as concerned with each individual return as it is with how your overall financial strategy is set up to help you reach your goals. 

When tax planning is done right, your financial professional will be in tune with your goals and values and help you create a plan that is aligned both with your current financial situation and help you get to where you want to be in the future. 

Tax planning isn't one and done. This process changes and evolves as your goals, circumstances, and priorities shift. It requires a deeper connection with your financial professional, instilling trust and transparency in the client-advisor relationship. Working together will give you the opportunity to see how your tax strategy fits into your larger financial plan. 

How a financial advisor can help

Here at Pro Wealth, we are passionate about establishing a foundation of trust, honesty, and transparency with our clients. Our fiduciary status gives us the ability to work in your best interest and organize your financial strategy in a way that optimizes your goals, values, and priorities. 

Tax planning is a big part of achieving that goal. Proper tax management can transform many aspects of your financial life, and we want to show you all the ways it can work for you. 

Both tax preparation and tax planning are vital elements of your financial life. Having a strong grasp on each of these elements will hopefully help you view taxes in a new way: a practice that can have a big impact on your financial life and reaching the goals you set. 

Interested in how tax planning can impact your financial plan? Schedule a time to talk with us. We can’t wait to hear from you.