What is the difference between tax planning and tax advice?
Tax planning is proactive and involves concentrating on the next one to three years. The main theme is to minimize a client's tax liability. Tax advisory is proactive. Of course, an advisor is concerned with the upcoming year but that's not the main goal.
Tax advisory goes beyond the traditional tax planning that most professionals offer. Tax planning is usually once a year and focuses on avoiding penalties. Tax advisory is year-round and goes beyond tax planning by communicating the tax savings that each strategy delivers—making them more actionable for clients.
Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. Considerations of tax planning include the timing of income, size, the timing of purchases, and planning for expenditures.
In contrast to tax preparation, tax planning is a year-round process that takes into account the client's past tax filings, current financial situation and regulations, and future financial goals, and their year-round activity.
Because although there is no blanket law or regulation that forbids financial advisors from giving any tax advice if they aren't registered tax practitioners like CPAs, EAs, or attorneys, there may be certain types of advice that could get an advisor in trouble if they don't hold these credentials.
A licensed tax preparer doesn't need advanced degrees for basic tax prep, but they must show competence through a formal exam or IRS employment. A CPA may be best for filers and businesses with complex tax situations or for those who seek financial planning and consulting services.
Tax planning is the process of reviewing various options for conducting business and personal transactions for the purpose of reducing tax liability. It involves making decisions on the timing and method of completing transactions and the reporting of income, deductions, and credits.
Taxes are one of life's certainties, and no one likes giving up some of their hard-earned cash. With proper tax preparation, however, it's possible to pay less in taxes or receive a larger refund at the end of the year.
Tax planning involves maximizing legal deductions and credits to lower your tax bill. Tax management, on the other hand, is a proactive approach to minimizing your annual taxes. It focuses on reducing taxable income to minimize your tax liability.
- Make the maximum retirement contributions.
- Contribute to a health savings account.
- Convert to a Roth IRA.
- Buy municipal bonds.
- Establish a donor-advised fund.
- Tax residency planning.
- Invest in qualified dividends.
- Hire your children to work for your business.
Who pays tax preparers the most?
| 1 | Legal Tax Defense | $52,439 |
|---|---|---|
| 2 | Optima Tax Relief | $48,150 |
| 3 | H&R Block | $45,009 |
| 4 | Liberty Tax Service | $44,484 |
| 5 | Jackson Hewitt | $41,069 |
While professional tax preparation can offer convenience and expertise, it can also come with potential drawbacks such as high fees and the possibility of errors or omissions made by the tax preparer. It's important to weigh these factors before deciding whether to go the professional tax preparation route.
| Pros of hiring a CPA | Cons of hiring a CPA |
|---|---|
| Deep knowledge base | Expensive |
| Additional financial modeling support | Still requires adequate bookkeeping |
| Audit support | Limited availability |
It's never too early. If you want to pay the least amount of income tax each year, then it may be helpful to start doing some tax planning. Don't worry—you don't need an accounting degree to make some smart tax decisions.
Bank of America, Merrill, their affiliates and advisors do not provide legal, tax or accounting advice. Consult your own legal and/or tax advisors before making any financial decisions.
An accountant provides tax advice, business finance advice and asset protection. On the other hand, a financial adviser can help you achieve specific financial life goals, like buying a home, funding your children's education, launching a business or retiring early.
A PTIN is a basic requirement that's relatively easy to get, though, so it doesn't hurt to go a step further and seek out a credentialed preparer who's also a certified public accountant (CPA), licensed attorney or enrolled agent (EA).
There are various types of tax return preparers, including certified public accountants, enrolled agents, attorneys, and many others who don't have a professional credential. You expect your preparer to be skilled in tax preparation and to accurately file your income tax return.
Individuals looking to work as tax professionals can either become a CPA or an enrolled agent. EAs only need to pass the SEE, while CPAs need to pass the Uniform CPA Examination and complete educational and professional requirements set by their state.
There are a number of ways you can go about tax planning, but it primarily involves three basic methods: reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.
Who benefits from tax planning?
Thoughtful tax planning is vital for any wealth-management strategy. It can help you save for your child's education or a retirement fund, grow your small business, maximize your income, and protect you from legal penalties, among other advantages.
Tax planning methods involve four key variables: The entity variable, the time period variable, the jurisdiction variable and the character variable.
Usually, tax planning consists in maintaining the taxpayer in a certain tax bracket in order to reduce the amount of taxes to be paid, which can be done by manipulating the timing of income, purchases, selecting retirement plans, and investing accordingly.
- Tax planning starts with understanding your tax bracket.
- The difference between tax deductions and tax credits.
- Taking the standard deduction vs. itemizing.
- Keep an eye on popular tax deductions and credits.
- Know what tax records to keep.
- Tweak your W-4.
- Tax strategies to shelter income or cut your tax bill.
Tax planning considers the tax implications of individual, investment, or business decisions, usually with the goal of minimizing tax liability. While decisions are rarely made solely on their tax impact, you should have a working knowledge of the income or estate tax issues and costs involved.
