Now that tax season is behind us, we thought it would be beneficial to highlight the differences between tax preparation, tax planning and tax strategy. This should help you evaluate the level of services you may need for your specific situation.
Tax Preparation
Tax preparation is the process of gathering your financial information and completing your tax return. This is typically a one-time event that takes place once a year. Tax preparation can be done by yourself, or you can hire a tax preparer to do it for you. Tax preparation is done after the tax year has ended and limits the number of options you have to reduce your liability. The outcome of the final liability is unknown until the tax returns are completed.
Tax Planning
Tax planning is a more proactive approach to taxes. It involves taking steps throughout the year to minimize your tax liability. This can include things like contributing to retirement accounts, deducting business expenses, and taking advantage of tax credits and deductions. You should do a wellness check annually to determine your projected liability and further actions you can take before the end of the year to minimize your liability. This allows you to manage your cash needs more effectively while removing the stress from the uncertainty inherent in just preparing your taxes after the fact.
Tax Strategy
Tax strategy is the most advanced form of tax planning. Tax strategy is a long-term plan that you create to balance your long term financial goals with tax minimization. It considers your current financial situation, tax & legal structure, future financial goals, and the ever-changing tax laws. It involves using complex legal and financial strategies to minimize your tax liability and accumulate wealth. Tax strategy is typically only used by high-income individuals and businesses.
So, which one should you do? It depends on your individual circumstances. If you’re a simple taxpayer with a straightforward tax return, then tax preparation may be all you need. However, if you’re a more complex taxpayer with a more complicated tax return, then tax planning or tax strategy may be a better option.
