Tax Preparation vs. Tax Planning: What’s The Difference?

A woman looking a financial charts

Financial planning includes taxes. In a world of taxes, it’s often a single event of filing them with the IRS, hoping to get a return, and not making any mistakes.

Even though filing taxes is integral to your financial housekeeping, they influence your financial strategy in many other ways. The preparation of taxes is a reactive process. The forms are filled out, submitted to your CPA, and that’s it. Taking a proactive approach to tax preparation will allow you to do much more.

Halsey Resources is committed to optimizing your finances through a comprehensive bookkeeping plan that considers taxes and strategies for optimizing your finances. You should know two tax and financial planning processes: tax preparation and tax planning. But, in your financial plan, how do these two processes differ and work together? Let’s look into it.

Getting ready for tax season: the basics

All working people are familiar with tax preparation: organizing, preparing and sending taxes. You prepare your tax return by organizing your W-2s, 1099s, and other financial documents to show how much you paid in taxes (and what deductions you can take).

To organize and file your tax documents on time, you may need the help of a professional tax preparer. An expert in tax law will ensure that you fill out and file your return correctly. In addition, when you work with the right professional, you can rest assured that your tax return complies with state and federal regulations.

As a rule, you will work with your accountant or tax professional once or twice a year to ensure everything is in order. You can get general tax advice from your tax preparer, like what deductions to take and other strategies, but you will need help proactively improving your tax returns.

Take a holistic approach to tax planning

Understanding that comprehensive tax advice exceeds the scope of properly preparing and filing your taxes is essential. It would be best if you had more time, knowledge, and expertise to get this holistic advice right. Tax planning comes into play once you are dealing with tax strategies.

Preparing your tax return is a backward process, focusing on what you did last year. In contrast, tax planning seeks to provide strategies that will place you in a good financial position in the future.

A tax preparation service also relies on your tax professional’s limited time during tax season. In most cases, returns must be filed within a short window, and even the most well-intentioned tax advisor must plan outside tax season. In addition, it isn’t easy to adequately prepare for the following year when clients stop thinking about them after April 15th.

Tax planning: what you need to know

An effective tax plan incorporates proactive measures to minimize tax obligations. The tax planning process examines every aspect of your financial plan from a tax perspective. Our goal is to enhance your existing financial plan and how it functions daily by including a solid tax strategy.

To develop a tax plan that works for you, it is vital to understand your goals, values, and priorities. As you might imagine, such comprehensive work is less concerned with your physical return and more about setting yourself up in a strong position regarding taxes.

For your plan to be successful, taxes must be considered in its structure and execution. Tax planning affects several areas in your life, including:

  • Managing your tax bracket in retirement
  • Asset location and asset allocation for your investment portfolio
  • An assessment of your risk tolerance and portfolio
  • Plans (401ks, IRAs, etc.) for retirement savings and distributions
  • Converting a Roth IRA
  • Harvesting tax losses may improve your returns
  • Donating to charity

As you and your plans evolve, tax planning shifts and evolves. Therefore, your plan should be reevaluated as things change and you move into different phases of your life. You may have a different tax plan when you are a pre-retiree than when you are retired. Using your money as a tool to help you achieve your goals and vision for the future is the key.

How Halsey Resources can help you

Both tax preparation and tax planning are essential to achieve your financial goals. At Halsey Resources, we believe a robust bookkeeping system can aid your tax preparation and planning. In addition, we can assist you in communicating accurate numbers to your CPA for tax preparation and tax planning. Get in touch with us to schedule a time to discuss how Halsey Resources can support your business.

About Angela Halsey

Owner of Halsey Resources. Helping small businesses with bookkeeping since 2008. Follow: Facebook · LinkedIn