27 Nov Why Tax Planning Works
A comparison of tax planning and tax preparation
Do you normally think about your taxes during the year, or do you just gather documents at year-end to prepare the return?
If you have a business, do you check on your business income throughout the year and consider its taxability and/or wonder about ways to reduce that taxability?
Do you evaluate your employer’s benefits plans and consider how they affect your taxable income, and do you look at government tax incentives each year and consider how to take advantage of them?
If you are not thinking about taxes during the year, you could be missing an opportunity to keep more money in your pocket or your investment account, or you can buy something you have been dreaming about.
A Proactive Approach
Tax planning enables individuals and businesses to take a proactive approach to meeting tax responsibilities rather than passively paying taxes.
The following shows the main differences between tax planning versus straight preparation at year end:
Focus:
Tax planning focuses on advance planning with the focus of minimizing taxes.
Tax preparation focuses on compliance with legal requirements to file a tax return in accordance with legal requirements;
Timing:
Tax planning is done throughout the year and can be done before the end of the year in the Fall.
Tax preparation is done after the end of the year, with returns due around April 15th, unless extended for 6 months.
Purpose:
Tax planning has the goal of maximizing tax savings, and it utilizes various structures and actions that the tax laws encourage or permit. Tax planning also involves goal setting and financial planning. Tax planning is a very intentional process.
Tax preparation is compliance focused, and all it involves is filing the correct forms and paying taxes in accordance with the calculations made in the forms.
Activities:
Tax planning involves a series of strategic proactive analytical activities that include but are not limited to the following: (1) Identifying tax savings opportunities that include deductions and credits; (2) Utilizing strategies that involve timing income and expenses, investment decisions, estate planning, and business entity structuring; (3) Evaluating the tax impact of life changes (e.g., marriage, education, home purchase, starting or selling a business); (4) Coordinating with financial planning and long-term goals.
Tax preparation involves a series of administrative and compliance related activities that include but are not limited to the following: (1) Gathering tax documents like W-2s, 1099s and receipts; (2) Completing and filing tax forms (i.e., Form 1040 personal return); (3) Ensuring accurate and complete reporting on the tax return; (4) Addressing IRS notices or audits for the filed return, if applicable.
Outcome and Goals:
Tax planning’s goal is to complete and implement a comprehensive plan to reduce tax liability legally, efficiently, and compliantly (i.e., with proper documentation and all proper actions completed).
Tax preparation’s goal is to file an accurate return on time and meet all liabilities to various taxing agencies.
Disclaimer: The information provided in this blog article is for general informational purposes only and should not be considered professional advice. While we strive to provide accurate and up-to-date content, tax laws, financial regulations, and accounting practices may vary depending on individual circumstances, and they are subject to change. Before making any financial decisions or taking action, we strongly recommend consulting via a formal engagement with a certified public accountant (CPA) or qualified financial advisor to address your specific needs and ensure compliance with current tax regulations. This article does not establish a client relationship.