Tax Preparation VS. Tax Planning

Many people expect to save the most amounts of taxes by hiring a professional to prepare their tax return. However, you may be surprised to learn that you could probably get some additional tax savings after your professional tax preparer’s work.  Recently, a fellow fee-only financial planner shared a story with us. He reviewed five tax returns prepared by an experienced CPA, and he was able to find extra tax saving opportunities from four out of the five tax returns. Other advisors and I also have the same experience. This week, I am going to explain the difference between tax preparation and tax planning, and how to get some real comprehensive tax planning advice.

First of all, you have to understand that tax preparation and tax planning are different. From a professional perspective, they are technically 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 both 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 optimize 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 they just answer your specific tax-related questions upon your request. However, many of you may not get proactive tax planning advices from them, such as how to use tax loss harvesting to offset your investment gains, how to manage your tax bracket, how to maximize your charitable deduction in a tax-efficient way, when you should do a Roth conversion, what to do with your stock compensations from the tax perspective, what's the most tax efficient way to take your money out from all your taxable and retirement accounts, how to strategically qualify for a larger mortgage amount or financial aid from the income perspective, and so on. Why? Mainly because tax planning is a separate engagement, requiring additional information, time and various aspects of knowledge other than tax filing

So, how do you get real comprehensive tax planning advice if needed?

1. Find a right professional

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. In my opinion, a professional or a team of professionals having knowledge and experience in both tax preparation and comprehensive financial planning is/are ideal for people who need competent tax planning advice.

I recommend you check with your current tax preparer first. If you think he/she is not qualified enough, try to find a professional or a team of professionals with either CPA/PFS or CPA/EA + CFP® designations behind their names.

Designations and certifications certainly do not guarantee you with a qualified professional and are definitely not the only things you should consider. However, it at least indicates a certain level of knowledge and experience and dramatically decreases your possibility of getting a nonqualified one. You could learn more about how to get a right professional in my previous blog post - "What Should You Know Before Getting A Professional To Help You Manage Your Personal Finances?".

2. Request tax planning service 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 which usually are not necessary for tax preparation. Once you identify the right professional, you still need to specifically let him/her know that you are looking for stand-alone tax planning service or along with tax preparation.  And you will get two separate service charges.


Hopefully, this post could help some of you understand the differences between tax preparation and tax planning and have more accurate expectations from your tax preparer. As always, I recommend you consult with a qualified tax and financial professional based on your specific situation.


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