What is The Difference in Tax Planning and Tax Preparation?

As the April sunshine harkens another spring, tax time rises once again. Welcome to tax season! While not as pretty as dawn-tinted tulips and golden peonies leaping from planter boxes in the yard, tax time is one of the most important times of the year.

For most people, they scramble to get their W-2 documents in order to send to the IRS before April 15. That requires sifting through paperwork, answering questions, and filling in information, a process known as tax preparation. But is there more to taxes than the endless loop of paperwork and Social Security numbers?


Tax planning encourages people to proactively seek ways to approach their taxes in a way that will optimize their financial strategy which is a more nuanced and forward-thinking practice.

How do tax preparation and tax planning interact with each other?

In this post, I’d like to distinguish the differences between tax planning and tax preparation and the ways that they can work together to encourage a comprehensive, forward-thinking tax strategy.

What Is Tax Preparation?

Tax preparation is the practice of filling out the paperwork required by the IRS to complete your taxes. This work is often completed by an accountant or tax professional who both assembles and helps you file your taxes for the current year. Your accountant will be fluent in tax law, and IRS regulations, and filling out forms which will help ensure your paperwork is all completed and filed correctly. Accuracy is really important when filing taxes and avoiding errors can help save you time and money over the years.

This process usually requires you to meet with your accountant or tax specialist once, maybe twice per year during peak tax time. Your tax professional will be able to help answer most basic questions you have about the filing process itself and offer rudimentary advice on savings tactics, but they will not be able to help you devise an overall tax strategy to help you save more over time.

Why not?

It is not because they don’t want to see you do well, it is just that creating a comprehensive strategy is a completely different task that requires much more time, research, and attention. When assembling tax documents from the previous year, you are looking backward. You look back at your work history, charitable giving, and other deductions. Tax preparation is looking backward, whereas tax planning is looking forward.

What Is Tax Planning?

Tax planning is a comprehensive financial strategy that helps build healthy financial practices and forward-thinking tax strategies over time. This process will require you to meet with your financial advisor many times throughout the year to establish your financial goals and how to act according to those goals.

When tax planning, your financial vision comes first. You assess your financial landscape as a whole including your debts, assets, and goals to help shape your future trajectory. Tax planning, therefore, is less focused on your physical tax return, and more focused on practices that will help save you more on that return in the future.

Tax planning occurs more frequently than every April. It is an ongoing process that shifts as you change and grow. It encourages you to be proactive about your finances and what you want to achieve in your life.

There are many practices that are involved in forward-thinking tax-strategies including:

  • Retirement accounts
  • Converting to a Roth IRA
  • Maximizing Charitable Giving
  • Awareness of Tax Bracket
  • Diverse Savings Channels
  • Understand Tax Loss Harvesting
  • Accelerating ExpensesRisk Tolerance and Portfolio Assessment

This list is a sampling of the many elements involved in tax planning. The important thing to remember is that tax planning looks at the full picture, whereas tax preparation only looks at one part of it. When you prioritize tax planning, you allow yourself to continue looking ahead and planning for your financial future.

A Financial Planner Can Help

When you work with a fiduciary, fee-only financial planner, you know that your interests and goals take first priority and will never slip from that spot. We are legally obligated to offer unbiased advice that has your best interest at heart, which is something we love to do and pride ourselves on!

Your tax strategy is an important facet of your financial plan. By working with a financial planner, you will have the opportunity to maximize your tax strategy by receiving customizedcustmoized advice based on your values and goals.

By having a solid tax planning strategy, your tax preparation will greatly benefit. When they work together, they provide the most comprehensive approach to your taxes by saving you money and keeping you in line with the IRS rules and regulations. It is important to employ both tax preparation and tax planning into your overall financial practices.

We love talking about taxes over here! If you would like to start thinking about proactive tax strategies, give us a call!

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