Tax Planning vs Tax Preparation

Posted by John Posey

With tax season upon us, I thought it might be a good time to highlight a key distinction when it comes to getting your taxes done. Does your tax preparer also provide tax planning in addition to tax preparation? (Yes, there is a difference.) Do you know so, think so, or just hope so? It may come as a surprise to some that a tax preparer is not inherently a tax planner - just as an investment advisor may not also be a financial planner.

The first four months of the year is the season for public accountants to prepare all the necessary tax forms for their clients often burning the midnight oil so to speak to get to keep up with the demands of the job. This is not an envious time for the tax preparing profession as many accountants commit to working long hours to get the work done by the filing deadlines. I witnessed it firsthand while working inside an accounting firm for more than 7 years. It’s no wonder that tax planning can become a complete afterthought if it even becomes a thought at all given the focus and pressure on getting the taxes prepared, out the door, and on to the next one. Getting in the zone of data entry, compliance rules, and recording the historical facts is how tax preparation gets done. Tax planning is done through a separate lens that involves strategic thinking.

Here's a quick illustration of the difference, compliments of Retirement Tax Services.

If you’ve been under the assumption your tax preparer is also your tax planner, you might ask yourself the following questions:

1.  When is the last time I received tax planning suggestions - without specifically asking for them?
2.  Do I communicate with my tax preparer before year-end to discuss tax planning considerations specific to my situation?

If you answered “recently” or “regularly” for question #1 and “Yes” to # 2, you also have a tax planner working for you which is great – it’s a valuable service and resource to have in your corner.

If you can’t remember or aren’t sure on # 1, tax planning likely isn’t part of your tax preparer’s standard operating procedure which is commonplace. This isn’t a criticism of tax preparers - they are doing what they are trained to do. Not to mention tax preparers often have many clients (hundreds or more) so it’s not too difficult to see how tax planning often isn’t a focus or possibly even a consideration. The economics of low-cost tax prep rarely supports or encourages tax planning – it turns tax prep into a commodity (taxpayer says: “Give me the cheap one!”) often with little to no capacity to provide tax planning (tax preparer says: “I can’t spend any more time on this than absolutely necessary!”). Given the additional time and cost involved with tax planning, it’s often just not practical for many accounting firms to offer it proactively, particularly during the regular demands of tax season. Effective tax planning involves three E’s: Effort (in thinking strategically), Experience, and Expertise. And sometimes it needs to involve multiple professionals depending on the complexity. This is not a highly scalable service like routine tax preparation.  

If you answered “No” to #2, it’s likely your tax preparer is not providing tax planning, however, that doesn’t mean they won’t or aren’t capable. Conducting a little due diligence would be wise – seek out tax planning experience that aligns with your situation. Sometimes if you simply ask, you will receive (the squeaky wheels get the grease!) but don’t expect tax planning to be free – it requires someone’s time and effort, and what results can be extremely valuable. Seeking out someone with a CPA (Certified Public Accountant) designation can be a helpful differentiator as they are likely to be capable and experienced in tax planning.  Business owners, taxpayers with fluctuating incomes, and the charitably inclined to name a few are often major benefactors of regular tax planning. This is not to say that everyone universally wants and needs tax planning, but often enough it can make a significant impact. And I’ve yet to meet anyone who enjoys paying more in taxes than legally required.

With that all said you might still say, “I have a really simple situation, it’s probably not worth the effort.” And I’d tell you it never hurts to ask and for no other reason than you don’t know what you don’t know. Even if you had to pay for an extra hour or more to have your tax return reviewed by a tax professional for planning suggestions, I would safely assume you have spent money in much less useful ways and what you potentially stand to gain is too significant. Besides, you should learn something worthwhile at a minimum and at best might discover something extremely valuable that would have never been uncovered otherwise.

Plains Advisory has found much success in tax planning with our clients and tax professionals specifically in service to those in or near retirement as we often discover meaningful planning opportunities with this demographic. From Roth IRA conversions and tax bracket management to charitable giving strategies and others, the opportunities to save tax dollars are much too substantial to let pass by.

Plains Advisory clients are encouraged to provide their tax returns annually for review – click here to learn how to electronically upload your tax return to the Plains Advisory client portal. A tax return review is just part of the package so you just as well take advantage of it.

If you’d rather tip your server over the IRS, you’d be wise to have a tax planner in your corner.

Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.