Just as there is a really big difference between Tax Fraud, Tax Avoidance, and Tax Evasion, there is a great distinction between Tax Planning and Tax Preparation. Unfortunately, many individuals have mistaken tax preparation and tax planning as they seem to be used interchangeably. Although they are both very important, they’re two totally different things.
Tax planning and Tax preparation have a great distinction. These are the different terms related to each other but have different actions. Tax Planning is a long-term year-round activity while the other gets the filing done.
What is Tax Preparation?
Tax Preparing is basically the process of compiling, preparing, and filing tax forms. This requires clients to meet with their tax accountants only once, maybe twice, a year, and that too during the busy tax season.
Tax preparation deals with income and numbers from the past or that may already show up on the income tax return. The client provides the required information and the tax preparer records and tallies up the number to tell you whether or not you owe money or receive a refund and how much.
What is Tax Planning?
On the other hand, tax planning is more long term and looks into the future to better plan and benefit the client for upcoming tax returns. It’s a year-round activity which can be more time consuming and requires a higher level of engagement between the client and tax accountant.
Tax planning seems like tedious work for tax preparers. They keep their clients in the dark on how to save money for their next tax return, but this is why tax planning is necessary. Clients and their tax accountants meet on a regular basis when needed and it builds a better professional relationship between them.
Accounting firms are better able to give proactive tax and accounting advice. Planning goes much further than preparing and it’s an on-going process. It’s often that the CPA tax accountant only sees last year’s tax returns and the mistakes or slip-ups made in the past. But with tax planning, they are able to fully analyze the client’s past situation and advise them on how to better their future returns and become more tax efficient.
Always make sure that effective tax planning is a part of your tax process as well as tax preparation. Tax preparation gets the filing done while tax planning helps come up with ways to minimize the amount of taxes the clients have to pay.