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The Difference Between Tax Preparation and Tax Planning

Many people expect to save the most money in taxes by hiring a professional to prepare their tax return. However, you may be surprised to learn you could probably get additional tax savings after your professional tax preparer reviews your taxes. It's important to understand the difference between tax preparation and tax planning and how to ensure you are receiving comprehensive tax planning advice.

Tax Preparation Versus Tax Planning

First, the distinction must be made between tax preparation and tax planning. From a professional perspective, they are two different services:

  • Tax preparation is a service that helps you file your tax returns. The main goal is to make sure your tax reporting complies with federal and state tax laws.
  • Tax planning is a service that helps you optimize your tax situation before reporting. The purpose is to use legitimate ways to reduce your potential tax consequences based on your goals and plans for future.

Some professional tax preparers may give you general tax guidance and tax savings advice based on your tax returns for recent years, or answer specific tax-related questions upon your request.

A tax planner can provide proactive tax planning advice, such as:

  • How to use tax-loss harvesting to offset your investment gains. (For related reading, see: Tax-Loss Harvesting Reduce Investment Losses.)
  • How to manage your tax bracket.
  • How to maximize your charitable deductions in a tax-efficient way.
  • When you should do a Roth conversion.
  • What to do with your stock compensations from a tax perspective.
  • What the most tax-efficient way is to withdraw money from your taxable and non-taxable retirement accounts.
  • How to strategically qualify for a larger mortgage amount or financial aid from an income perspective.

Tax planning is a separate engagement, requiring additional information, time and various aspects of knowledge other than tax filing. 

Find the Right Professional for You

Professional tax preparers are trained to be compliance experts on tax laws. However, many advanced tax planning strategies require a deep understanding of other financial planning topics like investment planning, employment benefits optimization, insurance planning, retirement planning, business planning and estate planning.

A professional or team of professionals who have knowledge and experience in both tax preparation and comprehensive financial planning is ideal for people who need competent tax planning advice. Check with your current tax preparer first. If you think they are not qualified enough, try to find a professional with either CPA/PFS or CPA/EA and CFP designations behind their names. (For related reading, see: The Alphabet Soup of Financial Certifications.)

Designations and certifications are definitely not the only things you should consider, but they at least indicate a certain level of knowledge and experience and dramatically decrease your possibility of getting an unqualified professional.

Request Tax Planning and Pay It Separately

Most qualified tax professionals offer tax preparation and tax planning as two separate services. Comprehensive tax planning requires a lot of additional data gathering, research and analysis usually not needed for tax preparation. Once you identify the right professional, you still need to specifically let them know you are looking for tax planning along with tax preparation. You will most likely receive two separate service charges.

Whichever route you decide to take, make sure you are choosing the one that will help you the most. Not everyone needs both tax preparation and tax planning, but if you do, taking advantage of the extra service by your tax professional can greatly benefit you.

(For more from this author, see: An Uncommon After-Tax 401(k) Contribution Strategy.)