The Difference Between Tax Filing and Tax Planning
By focusing on just filing their taxes, too many people miss out on the opportunity to tax plan strategically – and save!
Published April 5th, 2021
Reading Time: 4 minutes
Believe it or not, each year, American taxpayers combined overpay roughly $1 billion on their taxes. This money rightfully belongs in the taxpayers’ pockets, and it is the taxpayer’s job to make sure that they are not paying more than they are required each year.
The Difference Between Tax Filing and Tax Planning
Most people only think about their taxes on one day every year. They use a one-size-fits-all tax software to plug in their income and choose to take a standard deduction. However, simply itemizing their taxes, or knowing which expenses to include on which form, could save individual taxpayers several hundred dollars on their taxes. By tax planning, you can become more strategic when tax filing, while also ensuring that you’re not paying more than what’s required on your taxes.
What is Tax Filing?
Tax filing is the process of filing your tax return. It takes place once a year and will determine if you owe money to the IRS or if you will be receiving a refund. Many taxpayers choose to file their taxes on their own. Others choose to have their financial advisor file their taxes for them. However, using a financial advisor still doesn’t mean that you are taking advantage of all the tax breaks available to you!
Some financial advisors or accountants simply plug in your income and ensure that you are filing on time and in accordance with state and federal laws. While this can help ensure that you are not subject to any tax penalties or tax law violations, it still does not guarantee that you aren’t overpaying.
What is Tax Planning?
Every American income earner is required by federal law to pay taxes. That said, there are plenty of tax breaks available in the U.S. tax code to make sure that you are not losing any of your income to unnecessary taxes. This process is tax planning.
While tax filing usually only takes place on one day each year, tax planning is an ongoing process that should take place throughout each year. It usually involves working with a certified public accountant (CPA) or enrolled agent to create a tax strategy that helps the client lessen their tax burden. This can include itemizing taxes, maximizing deductions, using tax credits, and more to make sure the client does not overpay on their taxes.
Let’s be clear, tax planning is not hiding income, lying to the IRS, or scheming to avoid paying your fair share of taxes. Tax planning is making sure that you are using the U.S. tax code to your advantage to make sure you are saving money where tax laws allow.
Why is Tax Planning Important?
The value tax planning can provide is unique to each individual and their specific financial situation. Depending on your marital status, employment type, income amount, and more, there may be deductions and tax credits available to you that are not available to others. There is no one-size-fits-all filing strategy when it comes to taxes. Because of this, you need to be working with a CPA or other trustworthy tax professional to plan a tax strategy that is specific to you.
There are several examples of people who could greatly benefit from tax planning. Those who own a business could find ways to save based on the type of corporation they choose to set up. For small business owners, in particular, tax planning can be invaluable. Recently married couples may find ways to save on their taxes depending on if they file jointly or separately. Anyone with income from investments or real-estate transactions may be allowed certain tax breaks that they could be unaware of. Regardless of your situation, tax planning can provide you with opportunities to legally maximize tax savings and keep more of your income.
How to Start Tax Planning?
The U.S. tax code has nearly 4 million words. Just the instructions for completing Form 1040 are over 200 pages! Combing through the U.S. tax code is not a task to be taken lightly – the majority of taxpayers are not equipped to fully understand the tax code on their own. This is why the value of a tax advisor cannot be overstated. When working with tax professional, you may actually save more on taxes than what it costs to hire them.
If you’re looking to start tax planning, be sure to carefully vet the accountant or tax professional. It’s important to find someone who you trust to work with and share the details of your financial situation with. They should be someone that is certified (CPA), experienced, and who has a solid track record of helping past clients. Additionally, you should work with the tax planner year round, to ensure being strategic throughout the year as opposed to just during tax season. Focusing just on tax filing can mean you miss out on significant tax-saving opportunities. By tax planning, you are able to both look at your taxes more strategically and prepare more effectively.
Ready to Get Started?
Real financial planning should pay off today, and in 10 years' time.