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Tax Preparation vs. Tax Planning

Two different tax specialties, two different goals—both should be part of your financial management program

It’s that time of year again, when our minds and the media turn to one key topic—taxes. Whether you’re an ahead-of-the-game filer or a procrastinate-until-the-last minute person, you probably want to minimize your tax bill.

Laying that task on your tax preparer, however, may not achieve your goal. Why? Because there’s a difference between tax preparation and tax planning. Applying both areas of expertise to your tax situation is necessary to drive the best results.

Getting Proactive with Tax Planning

Most people are familiar with tax preparation. You have to fill out and submit those 1040s and and search out someone who can help. An expert can certainly assist you in making the right filing choices and taking all the deductions to which you’re entitled.

The problem is that tax preparation is essentially retrospective. You’ve already made most of the decisions that carry tax implications. If you sold a business, for example, the structure of the transaction affects your taxes due, but it cannot be changed after the fact.

Tax planning, on the other hand, is forward-looking. A tax planner will expect to meet with you regularly to adjust your tax strategies as your financial situation evolves. If you are self-employed, own a company, invest in the stock market, and/or buy and sell real estate, your financial advisory team should include a qualified tax planner.

What is a Tax Planner?

Unfortunately, defining this field of expertise is more difficult than it may sound. “Tax planner” is not an IRS-recognized title and there is no “tax planner” license to be had. Anyone can call themselves a tax planner, so this essential service falls into the “buyer beware” category.

It isn’t terribly difficult, though, to spot a good tax planner. Such an expert will have experience in many areas of finance and business, beyond the tax code itself. And because details matter in tax strategy, tax planning teams comprising various specialists are a great option.

Just remember you still need your tax preparer and it is often that is not the same person as your tax planner. They will work closely together on your behalf so it is nice if they have a similar philosophy regarding the rules, but more important they are working together in your best interest

Risk & the Right Match

In addition to seeking a highly qualified individual or team to handle your tax planning, you’ll also want to identify someone who sees the tax world as you do. Issues such as risk tolerance and what I’ll call “tax philosophy” come into play.

The fact is, we all have comfort settings. If dealing with the IRS makes you queasy, following the advice of a tax planner who takes an untested approach to certain deductions may keep you up at night. On the other hand, if you are striving to minimize your tax liability, you could be frustrated by a tax planner who has strong personal feelings against leveraging certain legal but unpopular tax loopholes.

Much like any other relationship, complementary perspectives matter. It’s worth having a frank conversation with any prospective tax advisor to ensure your viewpoints align.

How do you do that if you’re new to tax planning? In our next installment [LINK], we’ll help you assess your own risk tolerance so you can discuss your preferences with a potential tax planner.

Need more assistance in building a complete financial management team? We invite you to visit www.scfinancialservices.com for an overview of our comprehensive financial management programs. And yes, we recommend tax planners as part of our service!