As soon as the holiday season ends a new season begins, but not one that everybody wants to look forward to. Yes, tax season officially begins after New Year’s Day, and so does the clock to begin getting all the necessary paperwork pulled together prior to the general tax return filing deadlines.
Planning and Preparation Differences
However, there’s a big difference between tax preparation and tax planning. Most people unfamiliar with the differences confuse the two, sometimes leaving potentially big savings on the table for the tax agencies to collect when they don’t have to. That said, much depends on knowing when to take action before certain deadlines come into play.
Tax preparation is the process of getting one’s paperwork together for the purposes of filing a correct tax return. This includes W-2 statements, 1099 Forms, various documents identifying miscellaneous income, and documents that support tax credits or tax deductions. Once all the paperwork is collected, then a tax filer can file his return properly knowing all the backup documentation is in place to support any questions by a tax agency.
Tax planning involves making decisions and moving money earned into different accounts or investments to avoid paying more taxes than necessary on that income. This can include the use of retirement accounts, taking advantage of pre-tax health savings accounts, taking advantage of various tax deductions available and legal with supporting documentation, and reducing taxable income by increasing deferred income savings among other methods.
Ideally, the more tax planning done during the year, the bigger the benefits a person is able to gain come tax preparation time. This is because the 12 preceding months allow the person to divert taxable income into legal tax shelters, avoiding tax charges due after the end of the year. The income diverted, the less that remains for taxes. This effect is more than just a dollar for dollar adjustment. Because of the nature of tax brackets, the further down a person goes in taxable income during a year the lower his overall tax charge will be. This is because the amount of income taxed lowers in percentage as total taxable income decreases. Granted, the opposite happens as taxable income increases. This is why tax planning is so important; the biggest tax benefits can’t be scored after the tax year is over. By then, there’s only paperwork.
If you’re in the Mt. Laurel or Marlton, New Jersey, area and need help with both or either tax planning and tax preparation, Greenberg C.P.A. can help. We provide our clients the best tax planning and preparation advice for their situations, helping people avoid paying more taxes than necessary year after year.