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Tax Planning vs. Tax Preparation

Updated: Sep 30, 2021

Usually when we think of taxes, the first question that comes to mind is, “how can I pay less of them?” One thing we try to emphasize with our clients is that when considering taxes, think of them as a two-sided coin. The first side of this coin is tax planning - this is what we do throughout the planning process and discuss during most of our meetings. In any given year, the majority of the tax planning takes place BEFORE Dec. 31st of that year. After that point, tax planning hands off the baton to tax preparation. Tax preparation is the actual act of collecting all documentation, using software or professional help to determine all applicable deductions, credits, and other legal measures to shrink your tax burden to the lowest possible amount, and ultimately filing your federal and state tax returns.


There are opportunities for significant savings during both tax planning and tax preparation. However, after the ball drops on Dec. 31st, there are significant limitations on what you can proactively do to reduce your tax bill. Even the most skilled tax preparer can only work with what you have done up until the end of the calendar year, after that, he is locked in for the most part (with a few exceptions of contributing to Individual Retirement Arrangements (IRAs) or SEP IRA retirement accounts, etc.). For this reason, it’s crucial that you don’t underestimate the value of prior tax planning in reducing your overall tax burden. Tax planning will vary significantly from person to person, for instance:

  • For a middle-income earner, the most impactful tax planning centers on maxing all tax advantaged retirement accounts contributions available through their employer or IRAs.

  • However, there is typically more proactive tax planning both on the lower and higher ends of the income spectrum.

  • For lower income earners, it’s crucial to make sure we’re actively taking advantage of all tax credits and deductions that may be phased out for middle or high-income earners, as well as contributing to individual retirement accounts if those benefits aren’t provided by their employer.

  • For higher income earners, we start to see many of the deductions and credits begin to phase out completely; however, there are also typically more opportunities to utilize “below the line” deductions that exceed the standard deduction (simply because more deductible expenses typically correlate to more substantial income). Additionally, many higher income individuals receive income through business ownership, real estate and public equity investing, etc. that allows for more advanced tax strategies.

It’s important to remember that in order to take advantage of many of the topics mentioned above, the actions need to take place before the end of the calendar year. After that, your tax fate may be sealed...


If you’re still reading this and you're thinking to yourself, “wow, this is the most boring newsletter yet.” You’re probably right! Taxes are boring to most people (that’s why there are people like me around to help), but from a financial planning perspective they present one of the cleanest opportunities for boosting your overall financial position with relatively little cost or work. So, when we meet in the last quarter of the calendar year, let’s make sure we focus on boosting your financial opportunities before the ball drops. After all, that’s the best way to ring in a new year!


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