Tax Planning

Tax Planning vs Tax Preparation: The Variations, Defined

Both tax planning and tax preparation are valuable services to take advantage of. However, they have unique outcomes that will affect which services you should use. Knowing the difference between tax planning and tax preparation is the first step to utilizing these services.

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In 2020, the average federal tax refund was $2,827. If you’re like most people, you’re looking for ways to minimize the amount of taxes you need to pay. There are a few ways to do that, including hiring a tax professional.
But there is sometimes confusion over the differences between tax planning and tax preparation. While both are valuable services, they have their own purposes. Let’s take a look at the differences so you can choose which may be helpful to you.

What is tax preparation?
Every year, the majority of Americans are required to file their tax returns. But filing taxes is a complicated process that many are unsure about.

Tax preparation helps with this. It includes services that ensure you file your tax returns correctly. Most tax preparation services will include filing with federal, state, and local tax agencies.

Tax preparers take your recent financial information in order to file your return while meeting any applicable laws. They can help make sure you also take advantage of any credits or deductions that you are eligible for, especially if tax laws have recently changed.

If you have a complicated tax situation, hiring a professional tax preparer can be a helpful step. In addition, if you recently had any life changes, such as a change in household size or job change, a professional can take some of the confusion out of the picture.

What is tax planning?
Tax preparation is done before you file your taxes. It does not simply cover the tax filing process but extends into general financial planning.

Tax planning, specifically, is a service that allows you to optimize your tax situation so that the tax consequences of your financial moves are taken into account. Essentially, this means that it can help guide you to make the choices that are best for your situation.

The importance of tax planning may be larger if you have retirement accounts, investments, charitable contributions, businesses, and estates or inheritances that could affect your tax situation.

Some tax preparers do give advice as they prepare your returns. However, this advice is usually general and not intended for making proactive decisions.

Tax planning requires research and an understanding of your current financial situation and future goals in order to make helpful recommendations. For this reason, you will need to ask specifically for tax planning services if you are interested.

In addition, you may need to find a different tax planning professional if you are already using a tax preparer. Many preparers, especially those at large brands, are trained for tax compliance. They do not know the ins and outs of the system in order to make helpful recommendations.

Which Do You Need, Tax Planning or Tax Preparation?
Since you are most likely required to file an annual tax return, you will most likely benefit from tax preparation. Your options are to file your return on your own or get assistance from a tax professional.

If your tax situation is complicated, even a little bit, hiring professional tax preparation services may be worth it. They can make sure you are reporting correctly and find all of the credits and deductions you are eligible for, saving you money.

Tax planning should be approached on an individual basis. Not everyone needs tax planning. But, for those for whom it could be helpful, it is well worth it.

Many financial decisions have a large effect on your taxes for years later. Knowing what impact these financial decisions will have can help you make better choices. Plus, it can play into your overall financial planning goals as well.

Benefits of Tax Professional Assistance
One of the major benefits of professional tax assistance is knowledge. Taxes are a complicated issue. It is estimated that the federal tax code has over 1 million words, about as many as the entirety of the Harry Potter series.

This makes it hard for the average person to know everything about this system. Without dedicated time and effort studying it, it is impossible to know many of the rules that can save you money.

Luckily, a trained tax professional can take a lot of the uncertainty out of it. Even simply switching to a professional tax preparer could help you claim deductions and credits you didn’t know were an option.

Professional tax planning offers even bigger tax benefits. They can help distill information about how you should plan for retirement, investing, and even charitable contributions. They’ll be able to compare both your overall financial goals and how they affect your taxes.

Besides the potential financial savings, the peace of mind you can get from professional tax assistance is huge. You won’t need to worry as much if you are audited since a professional is less likely to file your return with errors.

You can also rest easy knowing your financial plans are being optimized. Stressful financial decisions may be more easily made and followed through with when you know the outcomes are thought through by a knowledgeable professional.

Know the Difference between Tax Planning vs Tax Preparation
Both tax planning and tax preparation are valuable services to take advantage of. However, they have unique outcomes that will affect which services you should use. Knowing the difference between tax planning and tax preparation is the first step to utilizing these services.

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