Tax Planning vs. Tax Prep: Here’s the Difference — and Why It Can Save You Real Money

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The terms “tax planning” and “tax preparation” are often used interchangeably, but they serve two different purposes. In short, tax preparation is looking back at what happened, while tax planning is a more forward-thinking process.

Knowing the differences can help taxpayers file accurately and set up their finances to save money. Here’s a closer look at the differences between tax planning and tax preparation.

Also see the difference between a tax credit and a tax deduction.

Tax Planning

Kurt Walcutt, CPA, principal with Sikich, explained that tax planning helps taxpayers decide what should happen this year and in future years.

“Tax planning is the proactive, forward-looking process of analyzing a taxpayer’s situation and proposed transactions to eliminate, minimize, or defer tax liabilities while still complying with the law and achieving business or personal goals,” he explained. This process is ongoing and not just a once-a-year exercise.

When it comes to tax planning, Caroline Hartmann, department chair for accounting at Purdue Global, recommended asking the following questions:

• Should I invest in a traditional Roth retirement account?
• How do I manage capital gains to avoid unnecessary taxes?
• If I sell a home, property or business, what tax implications should I consider before the transaction takes place?
• What type of insurance coverage should I have as part of my retirement planning?
• Should I have a will or a living trust? Are they necessary?
• If I have a side business or income, what type of entity should I use? 

“The goal is to change what will happen before it happens, so the eventual return reflects better outcomes,” Walcutt said.

Tax Preparation

“Tax preparation is the process of gathering documents, completing the tax return and filing it accurately and on time. It focuses on reporting what has already happened,” Hartman explained. “It typically involves preparing your tax return or having an accountant prepare it for you between January and April of each year.”

For tax preparation, Hartmann recommended asking these questions:

• Will or did I have any major life changes this year?
• Did I move to another state or have income in another state?
• Did I receive any W-2s, self-employment income, miscellaneous income or cash income?
• Did I have any unusual income items such as alimony, settlement payments, prizes, etc.?
• What types of deductions and credits can I take advantage of?
• Did, or should, I contribute to an IRA?
• If I have a business, what income and expense information do I need?

Why You Need To Recognize the Difference

“Recognizing that ‘planning’ and ‘preparation’ are different allows taxpayers to understand when they need to engage with their tax professional at the right time and with the right expectations,” Walcutt explained.

For example, several strategies, including retirement plan contributions, must be completed before a certain point in the year. “If taxpayers only engage at preparation time, these windows may be missed, and they simply ‘report what happened’ rather than impact what happens,” he said.

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