Why You Need Both
It’s that time of year again — the season of Americans gathering receipts and tracking down tax forms. The season of trying to remember (and finding documentation for) that charitable contribution you made last February. The season of making last-minute calls to an accountant and standing in long lines at the post office. That’s right, it’s tax filing season.
As familiar as we all are with this annual American rite of passage, we sometimes use the terms “tax filing” and “tax planning” interchangeably. However, these are two very different — yet equally vital — tax topics, and it’s important to understand the difference between the two.
Tax filing is the annual process of filing your tax return with the IRS, and it determines whether you owe additional taxes or are due a tax refund. Most Americans file their taxes once per year, and April 15 is the typical deadline for submitting either a final tax return or filing for an extension.
Some businesses and individuals work with a professional tax preparer in the months leading up to tax filing, while others choose to file on their own. However, most tax preparers’ main goal is to file your taxes correctly and avoid tax penalties, not to minimize the amount you owe. Tax preparers typically don’t provide any type of guarantee that you’re not overpaying to the IRS.
In contrast, tax planning is the ongoing process of employing various strategies to help minimize the amount you pay in taxes. Tax planning typically involves the help of a qualified tax professional who works alongside your financial advisor to identify opportunities to save you money.
Comprehensive tax planning spans all aspects of your financial life, including:
- Portfolio management strategies (tax-loss harvesting, asset location)
- Charitable giving strategies (donor-advised funds, qualified charitable donations)
- Estate planning strategies (lifetime giving, trust planning)
- Business planning (employer-sponsored retirement plan guidance, asset depreciation, corporate structure, business succession planning, pass-through income deduction)
- Income strategies (income tax minimization, retirement plan contributions, withholding optimization)
- Retirement saving and withdrawal strategies (Roth conversions, backdoor Roth IRAs, tax-efficient withdrawals, spend-down strategies, Social Security and Medicare optimization)
A qualified tax advisor will help minimize your tax liabilities, help optimize your withholdings, help maximize your deductions and apply relevant tax credits across all areas of your financial life. By taking a proactive approach to verifying your deductions, tax projections, withholdings, charitable goals, gifts and year-end financial moves, you have the potential to keep more money in your pocket after taxes.
Why It’s Important to Incorporate Both Tax Filing and Tax Planning Strategies
Your approach to both tax filing and tax planning can have a significant impact on the amount you owe in taxes. The U.S. tax code is incredibly complex. Unless you’re able to focus full-time on learning its ins and outs, you may benefit from the support and experience of a qualified tax professional who can help guide both your tax filing and tax planning strategies.
A certified public accountant (CPA) can work alongside your wealth manager to incorporate a wide range of tax planning strategies across your entire financial life, then coordinate the tax preparation and filing process to help ensure you’re taking advantage of all the deductions and credits available to you.
The bottom line? While tax filing and tax planning are two distinct processes, it’s important to ensure they’re working together to minimize the taxes you owe and optimize your tax-saving opportunities over time.
At Creative Planning, our experienced tax advisors work alongside your wealth manager to help ensure your tax filing and tax planning strategies remain on track. Our teams have experience navigating a wide range of tax and financial challenges, always with the goal of helping you achieve your long-term goals. For help with your tax planning strategy, or with any other financial matter, please schedule a call.