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Tax Planning Services vs Tax Preparation: Which Do I Need? Thumbnail

Tax Planning Services vs Tax Preparation: Which Do I Need?


Many people assume tax planning and tax preparation are the same. These services are very different. When combined, they help you maximize your personal and business income, investments, and bottom line, even after paying your taxes.

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What Is Tax Planning?

Different from tax preparation, tax planning is creating strategies to minimize your tax liability. Executing strategies that minimize your tax burden is a year-round process, not something you do right before the tax due date.

When you work with a tax planner, they consider current tax laws, new tax laws and regulations, and your current situation. They aim to prepare individuals for the lowest tax liabilities while staying within the current tax regulations.

What Are the Benefits of Tax Planning?

Tax planning offers many benefits for you and even your heirs when done properly. 

Benefits include:

  • Lowering tax liability. Essentially, reducing your liability for income tax as well as any investment gains or wealth tax is the main goal when working with a tax planner. Planning throughout the year, especially when you have business income, ensures you take advantage of the right tax credits, use tax-loss harvesting techniques in your investments, and manage your wealth accordingly.

  • Ensuring estate planning flexibility. Just leaving money for your heirs isn't enough. You may feel good about what you're leaving them, but you may not realize how you could complicate their tax situation. Tax planning not only ensures you lower your own tax liability but the tax liability of your heirs.

  • Understanding your investment returns. Capital gains, expenses, and even inflation can ruin your carefully thought-out investment planning, leaving you with much less than you anticipated.

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What Is Tax Preparation?

Tax preparation is typically a one-time process. Your certified public accountant (CPA) will prepare your tax return for filing by the tax deadline. Most individuals undergo tax preparation in January through April. Tax preparation requires documents to complete your tax return, including income documentation, any investment documents, and retirement plan statements.

What Are the Benefits of Tax Preparation?

While some individuals can prepare their tax returns on their own, most people benefit from professional income tax preparation services by letting tax professionals handle their tax returns and minimize their tax burden.

Benefits include:

  • Saving more money. Tax professionals understand tax laws and tax compliance. They know how to maximize your deductions and tax credits so you keep more money in your pocket.

  • Saving time. Completing your tax return independently takes a lot of time and effort. A tax professional could save you as much as 20 hours. You need to spend an hour or two with your tax professional, but they handle the rest.

  • Fewer errors. Erroneous tax returns can be devastating. Errors put you at risk for audit and penalties. When a tax professional prepares your tax filing, their guarantee that they followed tax laws lowers your risk for audit.

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Tax Planning vs. Tax Preparation

Tax planning and tax preparation sound similar, but there are many differences. You won't get the expertise you need for tax planning from a tax preparation business.

Tax planners may offer tax guidance or help you save money on your taxes. However, tax planning services are not proactive. If you want to minimize your tax liability, you must work year-round to acquire and execute tax planning advice. Some tax saving efforts may be made at tax time, but best results require careful planning throughout the year.

The most common services offered by tax planners include:

  • Tax loss harvesting strategy. If you have taxable investment accounts, you could be on the hook for large liabilities at tax time. Figure out the best tax loss harvesting strategies to use in your investments. Using a tax loss harvesting strategy ensures your investment strategies align with your needs.

  • Managing your tax bracket. Determine how to plan your income to manage your tax bracket. Offsetting certain income helps minimize what you owe on your taxes. Offsetting may include making retirement plan contributions or using other tactics to save for the future and decrease what you owe on your taxes now.

  • Managing charitable contributions. In some cases, donating to charity can minimize how much you owe on your taxes. A tax planner can help you determine if and how charitable contributions benefit you.

The most common services offered by tax preparers include:

  • Filing your tax returns.

  • Ensuring adherence to state and federal tax laws.

  • Managing missed deadlines and the necessary resolution paperwork.

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Tax Planning Services FAQ

How Much Does a Tax Planner Cost?

A tax planner's cost varies based on what the tax planner provides. You can buy tax planning software (not recommended), use your CPA, or, if you have complex tax reporting issues, hire a tax attorney.

What Does Tax Planning Require?

Tax planning requires consultation with a tax planning professional who understands your situation and helps you minimize the amount you owe on your taxes for personal and business income. You'll work with a professional year-round and provide your income documents, asset documents, and all other financial information, such as your retirement plan contributions and balances and estate plans.

What Are Tax Planning Strategies?

Tax planning strategies help you get your finances in order to reduce how much you pay at tax time. Using tax code, current tax regulations, and your financial information, tax planning determines how to best reduce the amount of income you lawfully report and/or how to best invest or use your money to reduce what you pay at tax time.

Use Tax Planning to Your Advantage

Take advantage of tax planning professionals who help you maximize your bottom line and minimize the amount you pay the government. Work with someone who is used to working with clients like you to get the most out of your service and your financial bottom line.

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