Financial Planning Essentials: Tax Preparation versus Tax Planning

June 20, 2024 By: Todd Schanel, CFP®, CPA, CFA, Jackie Goldstick, CFP®, and Douglas Marcello, CFP®, ChFC®

While tax preparation and tax planning are both critical components of managing your financial health, they serve distinctly different purposes. It’s essential to understand the difference between these two processes.

Tax preparation focuses on reporting past financial activities. This involves compiling and submitting tax returns to the IRS to report income, deductions, and credits for a specific tax year. Tax preparation ensures compliance with tax laws and regulations by accurately reflecting the taxpayer’s financial situation for the previous year. Based on the outcome of the tax return, the taxpayer can be sure they have paid the appropriate amount of taxes owed. Tax preparation is a reactive process, dealing with financial events that have already occurred.

On the other hand, tax planning is a proactive process that manages your finances with the ultimate goal of minimizing your overall tax liability over the long term. Tax planning considers multiple aspects of your financial situation, including investments, retirement planning, cash flow planning, business decisions, estate planning, and major life events. It results in strategic decisions to reduce your tax burden. Tax planning may include:

Managing the estimated payment process to delay payments while avoiding penalties and interest
Harvesting capital losses (or capital gains at a lower preferred rate)
Determining whether contributions to company retirement plans should be made on a pre-tax, ROTH, and/or after-tax basis
Determining eligibility for contributing to Traditional IRAs or ROTH IRAs, and which would be more beneficial from a tax standpoint
Evaluating if it would be prudent to convert portions of Traditional IRAs to a ROTH
Implementing tax-efficient savings programs through Solo 401ks, SEP IRAs, and Defined Benefit Plans
Withdrawing funds from tax-deferred accounts earlier than required to lower the average tax rate across retirement
Evaluating the tax implications of pension collection options
Quantifying the benefits of taking advantage of Net Unrealized Appreciation (NUA) treatment for those with company stock in workplace retirement plans
Determining the optimal way to make financial gifts to family and friends
Incorporating charitable gifting strategies that may include stock or cash gifts as part of an overall financial plan
Structuring a selling program to diversify out of concentrated stock positions
Considering estate planning strategies, such as preserving the capital gains step-up on large unrealized gains

In summary, tax preparation focuses on meeting your current tax obligations for the previous year, while tax planning involves implementing proactive strategies to minimize future tax liabilities. Tax preparation is typically an annual activity done around tax filing season, whereas tax planning is an ongoing process that requires regular review and flexibility to reflect changes in tax laws and personal circumstances.

At Core Wealth Management, tax planning is an integral part of the comprehensive financial plans that we develop, implement, and monitor for our clients. We firmly believe that professional help with tax planning can significantly reduce the tax burden over time, allowing individuals to keep more of the money they make and bringing them closer to realizing their financial goals.

Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.

Todd Schanel, CFP®, CPA, CFA is the Principal and Director of Investment Advisory Services at Core Wealth Management.

Jackie Goldstick, CFP® is the Principal and Director of Financial Planning at Core Wealth Management. She is a member of the National Association of Personal Financial Advisors (NAPFA) as well as the Financial Planning Association (FPA).

Douglas Marcello, CFP®, ChFC® is a Wealth Advisor and A Certified Financial Planner® practitioner. He is a member of the National Association of Personal Financial Advisors (NAPFA).

The material provided is for informational purposes only and should not be construed as financial, legal, or tax advice. All investments carry risks, including the loss of principal, and we encourage you to consult a qualified professional for personalized guidance. Click here to view our entire blog disclosure.

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