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Tax Preparation Versus Tax Planning

By Bob Boehner

When having your taxes prepared—whether by using a tax program or a tax preparer—the expectation is to end up with the lowest tax bill possible. Unfortunately, such an expectation may be inaccurate.

Most tax programs and tax preparers take data and diligently place the numbers in the right box to get the optimal tax response. In terms of the W-2 form, it requires slotting in the stated wages into the correct wage box and listing the correct “tax withheld” in the federal or state return. With itemized deductions, it requires correctly inputting all medical expenses, tax expenses, mortgage interest, and charity and miscellaneous deductions. In regard to Schedule B, it requires properly allocating “income” to “interest income” versus “qualified dividend income” or “tax-free income.”

With every form used, the information must be properly placed, and all of the key boxes must be checked for the computer program to provide the final correct tax liability. Any mistakes could over- or under-report your tax liability. If your tax liability is over-reported, then it will likely result in money that is lost forever. If your tax liability is under-reported, then you run the risk of receiving an IRS notice of under-paid taxes with associated interest and penalties. Such tax preparation issues require critical consideration, and many tax preparers and tax programs do a fair job of getting the taxes prepared correctly based on the information provided.

What many taxpayers do not realize is that the majority of tax preparers and tax programs do not engage in tax planning. Understanding how to maximize retirement plan contributions; how to receive the American Opportunity Credit, even when your income is too high; how to utilize a Roth IRA, even when your income is above the Roth income limits; how to maximize depreciation on a building; how to use medical savings accounts; when to add or remove dependents on a tax return; how to construct a tax-efficient portfolio; how to maximize and protect business deductions; how to maximize and protect charitable deductions; when (and when not) to itemize…many of these items are not considered during the tax-preparation process.

This is not what a tax preparer does, but it is instead the domain of a tax-skilled financial advisor. There are few financial advisors who have a dual credential of CPA (Certified Public Accountant) and CFP® (Certified Financial Planner). Tax planning is most important from January 1 to December 31, as opposed to from when the year ends and up until April 15 (the tax deadline date). A comprehensive advisor skilled in tax preparation can help navigate the tax process from January 1 to April 15 of the next year to minimize your tax liabilities.

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