Tax Prep vs. Tax Planning: What’s the Difference?

Summertime – the days of golf outings, baseball games, and family vacations. The last thing you probably want to think about is your taxes. However, if you read our blog post last month, you are probably realizing the summer months are the perfect time to do a mid-year checkup.

At PDS Planning, our clients often ask us about the difference between tax prep and tax planning. While these two terms may sound similar, they are quite different.

Tax prep is the process of preparing your annual tax return. This includes gathering your financial information, such as W-2s, 1099s, and receipts, and entering it into a tax preparation software program. Various professionals, including CPAs, enrolled agents, and tax preparers can provide tax prep services.

Where tax prep is akin to reading the story of your previous year’s income, tax planning is more like writing the story. Tax planning is the process of taking steps throughout the year to minimize your tax liability, both in the current year and in future years. This includes reviewing your financial situation, identifying tax-saving opportunities, and implementing strategies to reduce your taxes.  These strategies often consider multiple generations and may change as the tax code changes.  Tax planning can be a complex process, and the PDS team is available to walk you through the process every step of the way.

What are some of the key differences between tax prep and tax planning?

  • Timing: Tax prep is typically done once a year at tax time. Tax planning is an ongoing process done throughout the year for our clients.
  • Goals: Tax prep aims to ensure you file your taxes accurately and on time. Tax planning seeks to minimize your tax liability and maximize your financial well-being.
  • Complexity: Tax prep is a relatively straightforward process for most people. Tax planning can be more complex, depending on your circumstances.
  • Cost: Tax prep services typically cost less than tax planning

Do I need tax planning?

When deciding if you should be tax planning, consider the complexity of your tax return. If you have a simple tax return, there may not be much planning and simple tax prep might be sufficient. However, as your financial picture grows in complexity, tax planning may be a wise option to cover all bases and take advantage of the ever-changing tax code.

If you are unsure whether you need tax planning services, then it is a good idea to consult with a financial advisor or tax professional. They can help you assess your needs and recommend the best services. If you find yourself asking questions about your taxes, please reach out to your PDS team so we can help you identify opportunities for tax savings this year. Enjoy the rest of your summer!

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