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For many Americans, the thought of taxes goes hand in hand with mild anxiety. That anxiety can lead people to lump everything tax related into one bucket. (Usually, it’s a bucket labeled “I’d rather not.”)

Perhaps, because of that, we see people get confused about the difference between tax planning and tax preparation and which type of financial professional to hire for help. Here, we’ll clarify the difference between preparation and planning, review who handles what, and share an example of how a financial advisor may work with other professionals to help you save money on taxes.

Tax preparation

Tax preparation deals with the logistics of your tax return and is usually handled by an accountant. These professionals gather the required paperwork, calculating your taxable income, and working to minimize your tax bill in a given year.

While there is software that can handle tax preparation, we encourage folks to work with certified public accountants and/or IRS-enrolled agents that specialize in tax preparation. These professionals have a deep understanding of both federal and local tax codes; they can help you minimize your tax liability while working to protect you from a potential audit or IRS flag.

While there’s an added expense to working with tax professionals, Quorum clients who work with specialists tend to recoup the cost in tax (and time!) savings.

Typically, tax preparation work happens just once a year, between February, when Form 1099s are provided, and April 15, the individual filing deadline. If you have quarterly tax obligations, or any other life milestones or changes, however, you may need to meet more frequently.

Tax Planning

Where tax preparation handles logistics and filing, tax planning looks at your life and finances holistically to create a big-picture tax strategy. Often, this requires a collaborative effort amongst financial advisors, estate planning attorneys, tax accountants, and other members of your financial team. While tax preparation tends to happen once a year, tax planning is a year-round activity.

At Quorum, we contribute to tax planning in a few ways. We consider a client’s short- and long-term goals and their strategic financial plan. Tax efficiency can factor into the success or failure of that strategy. To identify opportunities to optimize tax efficiency, we also look closely at tax location, special investment strategies, and potential estate tax situations.

Additionally, we work with clients and tax advisors to make appropriate tactical financial decisions. For example, we coordinate with tax advisors to help clients minimize their tax liability on exercising equity stock options. We may highlight when a client needs to adjust the withholding on their bonus compensation. We might point out when a market correction makes a Roth conversion more appealing; while your tax accountant might highlight when your annual taxable income does the same thing. By working with the other experts on your team, we may be able to spot tax opportunities across different, sometimes niche, areas of your finances.

If you have questions about tax planning at Quorum or your own overall tax plan, contact us.

Read more:

How to leverage the Estate Tax
How contingent fee attorneys can lower their taxes
Roth conversions: When and why they make sense