Shakespeare Blog: View from the Lake

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Tax Planning vs. Tax Preparation

Written ByBrian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Tax Planning

Taxes are a critical piece of your financial picture. Receiving sound advice and guidance while ensuring you file an accurate and timely tax return is one of the most important parts of your financial plan.

When an individual is receiving tax services, there are two key components: tax planning and tax preparation. What is the difference? Which one should you be focused on? Do you need both?

While both are essential for managing your taxes, they serve distinct purposes and require different approaches.

Definitions of Tax Preparation and Tax Planning

It’s important to understand the difference between these two services. In the simplest terms:

Tax preparation involves gathering your tax information, completing your tax forms properly, and filing the forms with the IRS along with any state returns that may be required. Tax preparation can be done on your own, or in conjunction with an expert like a Certified Public Accountant (CPA) or Enrolled Agent (EA).

Tax planning is the on-going process of exploring strategies to minimize the amount of tax you pay over time.

What Does Tax Planning Entail?

Tax planning is not a one-time event. This occurs over many years to ensure you are paying the least amount of tax required while trying to achieve your financial goals.

Tax planning often applies to all areas of your financial life. When Shakespeare helps a client with tax planning, some of the most common areas we may provide advice include:

– Portfolio Management (Tax Loss Harvesting, Householding of Accounts)

– Income Strategies

– Deduction Maximization (Deduction Bunching)

– Charitable Giving (Donor Advised Funds, Qualified Charitable Distributions, Donating Appreciated Securities)

– Retirement Savings and Withdrawal Strategies (Roth Conversions, Backdoor Roth IRA Contributions, Tax-efficient Withdrawal Strategies, Social Security and Medicare Optimization, Beneficiary Planning)

– Estate Planning (Lifetime Giving, Estate Tax Planning)

How is Tax Preparation Different?

Tax preparation focuses on the process of completing your tax return. It includes gathering documents, completing the forms, and filing the returns with the appropriate tax authority.

Gathering documents ensures you have all relevant forms needed to accurately report and support your various sources of income and deductions you had throughout the year. Once those documents are available, the proper tax forms can be completed for both your federal return and state returns, if required. Once the forms are properly completed, they can be filed with the appropriate tax authorities. Your federal return is filed with the IRS, while the state returns will be filed directly with each state’s taxing authority.

Most people choose to work with a professional tax preparer, although you are able to file your returns on your own using one of many tax preparation software tools available.

Integrating Your Tax Planning with Your Tax Filing

Tax planning and tax preparation serve distinct purposes but are closely related components of a comprehensive tax strategy. Effective tax planning greatly aids your tax preparation process, helping you gather the necessary documents, identify potential tax-saving opportunities, and ensure compliance with tax laws.

By integrating tax planning into your overall financial plan, you can optimize your tax efficiency, potentially minimize your tax burden and work towards achieving your financial goals. Proactive tax planning can make a meaningful difference in your financial well-being both now and in the future.

While tax planning focuses on strategic decision-making and both short and long-term tax optimization, tax preparation is the completion and filing of tax forms to comply with tax laws. By understanding the distinction between these two processes and integrating them into your financial strategy, you can navigate the complexities of taxation more effectively and make informed decisions that support your financial success.

Contact your Shakespeare advisor for more information on how they can work with your tax preparer to help you streamline your tax preparation and tax planning.