Tax Planning vs. Tax Preparation
Many taxpayers think about their taxes only during the tax season. While this is sufficient for covering the return filing obligation, most forward-looking tax strategies must be thought of proactively ahead of time. This is the main difference between tax preparation and tax planning.
Tax preparation is a reactive, backward-looking process that focuses on fulfilling your return filing obligations based on the previous year’s financial activities. While there are opportunities for optimization and deductions during this time, many of these benefits diminish if not acted upon by the year-end. Additionally, since tax preparation often occurs during the busiest time of the tax season, many accountants prioritize timely filing over proactive planning.
Tax planning, on the other hand, is a proactive, forward-looking approach that aims to maximize your financial position by minimizing tax liabilities. It involves making strategic decisions throughout the year to ensure you are taking full advantage of tax-saving opportunities. Engaging in tax planning can help you:
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- Optimize Filing Status: Decide whether to file jointly or separately to minimize tax liability.
- Leverage Homeownership Benefits: Identify tax benefits related to purchasing a home.
- Maximize Family-Related Tax Breaks: Take advantage of all available tax breaks related to your children.
- Utilize Business Deductions: Determine eligible deductions for your dormant or startup company.
- Enhance Retirement and Health Savings: Get the most out of your 401k, HSA, and other savings plans.
- Understand Roth IRA Benefits: Evaluate whether using a Roth IRA is beneficial for your situation.
- Identify Business Deductions: Explore applicable business deductions and other strategies to minimize tax exposure if you are filing as an employee.
- Make Informed Investment Decisions: Decide whether to exercise stock options or sell equity for optimal tax outcomes.
- Ensure Adequate Withholding: Verify if your company is withholding enough from your pay to cover your tax obligations adequately.
- Prepare for Tax Liabilities: Anticipate and plan for any taxes owed, including strategies to manage payments.
- Defer Tax Liability: Explore programs and strategies for deferring tax liability.
- Consider State Tax Implications: Assess the tax effects of moving to a different state.
- Review Past Returns: Have prior-year returns reviewed to ensure you utilize all possible deductions and tax benefits.
These are just a few examples of the questions we address regularly. We have found that clients engaging in mid-year tax planning with us tend to save at least several thousand dollars annually, and in some cases, their savings reach into the five figures.
However, strategy takes time to implement, so if you need help, reach out to our team at Goering & Granatino today.
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