But wait, aren’t tax planning and tax preparation the same thing? Not at all. You’re probably used to hearing them used interchangeably. However, they couldn’t be any more opposite. From a professional standpoint, they’re two entirely different services. Confused? Don’t worry, most people are. We broke it down so you can understand the difference and decide which to choose for next year.

Tax Preparation

This is the most common tax practice. Most Americans see their accountant or tax preparer once or twice during the busy season of February through April. Simply, tax preparation helps you file your tax returns. This ensures compliancy with the IRS while looking for tax savings. This strategy can be most useful for those with simple tax situations.

Tax preparation for the most part follows a template and is not fully customized. This strategy typically involves gathering, prepping, and submitting the necessary forms. Some people chose to do this themselves or through an online tax preparer. This strategy relies on finding savings rather than making savings. What’s the difference? When finding savings, you’re looking for ways to deduct expenses from your taxes. When making savings, you’re planning your expenses to legally reduce the amount of tax you’ll pay.

Tax Planning

If you’re like many people who wait until tax season to focus on taxes, it’s too late for planning. Tax planning designs a customized game plan based off your previous, current, and projected future spending. The right tax professionals know, understand, and stay informed with changes on the IRS Tax Code so they can ensure you’re compliant with the law while reducing your tax liability. They advise you how to spend and report before you do anything. These plans can go as far as 20 years into the future, though it might need a revamp with any tax law changes. This strategy also requires a meeting with a CPA several times a year to ensure you’re making the most of your expenses.

This money-saving tax style isn’t for everyone. Usually, business owners or those with several or complicated income paths utilize this strategy. Most professionals will provide you with a blueprint with their suggestions and how to spend wisely.

While tax planning may cost more upfront, it can also save you much more than traditional tax preparation. Tax professionals spend more time researching and analyzing because it is unique to your situation. This can also ensure you’re staying on the good side of the IRS through the extensive knowledge and research of the professionals while keeping more in your wallet.

Which is Right for You?

Without a proper custom analysis, it’s hard to say which is best for your situation. For a quick decision, consider this: if you have a simple tax situation, tax preparation may be a better option but if you have a complicated tax situation or own a business, tax planning could be more efficient. If you feel you’re not making the most of your tax reductions, meeting with a tax professional could help.

If you aren’t sure which to choose, let us help!