Wednesday, February 12, 2014

The Difference BetweenTax Planning and Tax Preparing

Eleanor Blayney for the Wall St Journal - EXPERTS writes: What mistakes do people make when planning their approach to taxes?
 ELEANOR BLAYNEY: Tax payers often confuse “tax planning” with “tax preparation.”  The first looks forward for opportunities and strategies to reduce your future tax liabilities. “Tax preparation,” by contrast, requires looking in the rear-view mirror, gathering and organizing your information from a past year, primarily for compliance with tax laws.
Nevertheless, most people think they’re planning when they’re preparing.  This time of year especially, everyone fixates on taxes, trying to reduce the amount they’ll owe on April 15. The problem is there aren’t many ways to significantly reduce 2013 taxes when you’re midstream in 2014. Once the tax horse is out of the proverbial barn, the best advice involves reminding taxpayers of deductions and credits they might otherwise forget. However, any competent tax preparer or online tax-preparation software will optimize a taxpayer’s options, such as filing status, the use of standard versus itemized deducting, or the availability of credits based on dependents.
The goal of tax preparation is to avoid leaving money on the table. The goal of tax planning is to have more money on the table in the first place.  Americans would be far better off if they worked with a Certified Financial Planner to consider strategies they can use going forward–such as timing income and deductions across different tax years, the best retirement plan options, or IRA and 401(k) conversions into Roths–as they do on making sure the i’s are dotted and the t’s crossed on their 1040 for last year.
As for other mistakes–like getting big refunds every year or confusing what is owed on April 15 with total tax liability–don’t get me started.
To Subscribe to the Wall St Journal Click Here.