When you think about tax season, your mind probably goes directly to the preparation side of things. After all, that’s where all those detailed spreadsheets and calculations live. There’s something a bit less well-known that comes before that preparation step, through—tax planning. It sounds like something an accountant would spend their leisure time on, like something to put their professional services to use. But it’s an important part of preparing for taxes nonetheless. In this article, we’ll look at the difference between tax planning and tax preparation and see which one will help you save more money come April.
What is Tax Planning?
Tax planning is the process of trying to come up with strategies so you don’t have to spend as much money on your taxes. For example, you might decide to take advantage of certain tax breaks that are likely to help you offset the cost of living. When you do this, it’s called tax saving. When you decide to make different investments, like buying stocks right before a certain date so they rise in value, it’s called tax-efficient investing.
These are just two examples of things you could do to save money on taxes. By strategically considering the money you earn or the expenses you can use as a deduction or tax credit, tax planning becomes an opportunity to explore ways to maximize these benefits.
For example, if you have a large medical expense, you might be able to use that as a tax deduction or credit. Consider the possibility of securing your investments for future utilization, particularly in cases where they yield lower returns currently, but possess the potential to generate substantial profits in the future.
What is Tax Preparation?
Tax preparation is the actual work you have to do to file your taxes. It’s when you input your income, subtract your expenses, and file that paperwork with the government. In short, it’s what you have to do to get your taxes done. And while there may be a few people who do enjoy the work involved in tax preparation, it’s not something anyone wants to do.
There are a few reasons why you might need to have your taxes done. The first is because they’re your job. If you have to have your employer withhold taxes from your paychecks and send them to the government, then you’ll need to have your taxes prepared. Another reason is if you have a lot of money coming in. If you have a large income, you’ll need to have your taxes prepared.
Is There a Difference Between the Two?
Yes and no. In some ways, tax preparation and tax planning are very similar. To put it simply, tax planning is about finding ways to save money on taxes, and tax preparation are when you do that by using your previous planning and tax data.
However, tax planning is much broader. It can encompass financial decisions like making sure your large investments are around for the long run and avoiding large deductions if possible. It can also be as simple as determining when you should have your taxes done so you have more money to pay them.
Tax planning, on the other hand, is much broader. It can include financial decisions like making sure your large investments are around for the long run and avoiding large deductions if possible. It can also be as simple as determining when you should have your taxes done so you have more money to pay them.
How to Save Money on Taxes Through Tax Planning
Maximize your deductions
When you have your taxes done, you’ll have to report any income you received. However, there are certain expenses that you can deduct from your income. These are called tax deductions, and they can be a huge help. If you have a large medical expense, for example, you may be able to use that as a deduction.
Make sure your investments are long term
If you have a large amount of money coming in, such as with stocks or investments, it’s important that you make sure they pay off in the long run. If you sell them before they’re ready to make a profit, then you’ll just end up paying tax on the profit and have to wait even longer to get that money back.
Understand when you need to have your taxes done
You must make sure you have your taxes done. This can be different for different people based on their income and how they spent their money.
Take advantage of tax credits
Tax credits are even more helpful than deductions in the fact that they don’t have to be used, which means you get to keep that money whether you use it or not.
There are a few tax credits that can help you save on your taxes. Some examples include the Earned Income Tax Credit and the Child and Dependent Care Credit.
5 Final Tips for When You’re getting ready to Prepare Your Taxes
Get help from a professional
There are a few ways to get help when you need it. You can hire an accountant to file your taxes for you. You can also hire a tax preparer to help you with the math. However, you might find that hiring someone to file your taxes for you is cheaper than hiring a tax preparer to help with the smaller stuff.
Familiarize yourself with the tax code
Tax law is constantly changing, and it’s important that you know what’s in it. To begin with, you can read the tax code online to become more familiar with it. You can also read it as a book or in a paper format. Once you understand it better, it will be easier to navigate the process of filing taxes.
Make sure you have all your information from your taxes
This includes your W-2 from your employer, any investment information you have, and any information from your insurance company, such as medical claims. Make sure you don’t miss any of these things when you file your taxes.
Keep a copy of your taxes
It’s best to keep a paper copy of your taxes. This way, you can go back and look at them if you need to make changes, such as adjusting your withholding or hiring someone else. This way, you’ll have a better understanding of what you need to do when you have your taxes done.
Be organized when you have your taxes done
You must have all your paperwork in order when you have your taxes done. This way, you will save yourself time and make sure you don’t miss any important information.
Conclusion
When you think about taxes, you probably immediately think about the preparation side. You may even see the word “tax” in the name of a book or a movie. But you might not realize that you have to think about tax planning before you get to that preparation. Tax planning involves finding ways to save money on taxes, such as maximizing your deductions and investing in things that will pay off for the long term. To do this, you’ll have to get familiar with the tax code and make sure you have all your information from your previous taxes together.