By Kevin Boutwell, CFP®, CIMA®

We have to admit, the financial industry is wrought with jargon and initialisms. Understandable, we often get questions about when a person should engage a CPA or Wealth Manager; and if CPAs specialize in taxes, why do some Wealth Managers indicate they do tax planning.  Tax preparation and tax planning are both essential aspects of managing your finances, particularly when it comes to your tax liabilities. However, they involve different activities and have distinct purposes sometimes done my different professionals. Surprisingly, most executives and business owners that are engaged with a CPA are not actually getting tax planning.  In this article, we’re going to tackle the differences between the services offered so you’re better informed. Let’s dig in.

Tax Preparation: Tax preparation refers to the process of gathering, organizing, and submitting all the necessary documentation and information to calculate and file your tax return with the relevant tax authorities. This includes:

1. Document Collection: Gathering all the relevant financial documents such as W-2s, 1099s, receipts, statements, and other documentation that are needed to accurately report your income, deductions, credits, and other financial activities.
2. Calculation: Using the collected information to calculate your taxable income, deductions, and tax credits. This process ensures that you are reporting the correct amount of income and taking advantage of all eligible deductions and credits.
3. Filing: Completing the required tax forms (such as 1040, 1040A, or 1040EZ) and submitting them to the appropriate tax agency, whether it’s the Internal Revenue Service (IRS) in the United States or the equivalent authority in your country.
4. Deadline Adherence: Ensuring that your tax return is filed on time to avoid penalties and interest for late filing.

Tax Planning: Tax planning, on the other hand, is a proactive approach to managing your finances with the goal of minimizing your tax liability over the long term. It involves strategic decisions and actions taken throughout the year to legally optimize your tax situation. Some key aspects of tax planning include:

1. Income Management: Strategically timing when you receive income or make withdrawals from investments to minimize the tax impact.
2. Deduction and Credit Optimization: Identifying eligible deductions, credits, and exemptions that can help reduce your taxable income and overall tax liability.
3. Investment Strategies: Making investment choices that take into account the tax implications of gains, losses, and dividends.
4. Business Decisions: Structuring your business operations in a tax-efficient manner, taking advantage of deductions and credits available to businesses.
5. Estate Planning: Developing a plan for passing on your assets to beneficiaries in a way that minimizes estate and inheritance taxes.
6. Retirement Planning: Utilizing tax-advantaged retirement accounts and strategies to minimize taxes in retirement.

The main difference between tax preparation and tax planning is that tax preparation focuses on accurately reporting your financial information on your tax return, while tax planning involves making strategic financial decisions throughout the year to optimize your tax situation. Both are important for managing your finances effectively and legally minimizing your tax liabilities.

Which One Is Right for You?

Now that we’ve examined the differences between Tax Preparation and Tax Planning, you may be asking yourself, “Which professional is right for me and my needs?” That’s a tricky question to answer, however. It may be the case that you could benefit from working with both a CPA and Wealth Manager that does tax planning. If you’re solely concerned at the moment with how to handle a tax situation, your best bet would probably be seeing a CPA. If you’re in need of an overall financial deep dive or are concerned with a specific financial situation like retirement or funding your children’s higher education, you would probably benefit from seeing a wealth manager. 

CPAs are certainly qualified to handle both Tax Preparation and Tax Planning.  However, in practice it’s common for CPAs to focus on tax preparation, taking in your documents at the beginning of tax season and helping you file your return.  This more reactive approach may be due to a capacity constraint, lack of awareness of your full financial picture or simply it’s not part of their service model. In contrast, a qualified wealth manager experienced in tax planning knows your overall financial picture and can estimate your taxes owed for the current year and future years.  Having this insight into what your tax bracket is this year and several years later allows for strategies to be implemented that can be advantageous for you. Here is a simple example, Mrs. Client is in her last five years of working and is expected to be in the highest tax bracket at 37%.  Once retired in five years, she will have zero earned income and only minimal qualified dividends putting her in the 12% tax bracket.  While still employed, she should defer as much income as she can via Traditional 401k contributions and Non-Qualified Deferred Compensation plan contributions and look to take qualified distributions in her low tax bracket years.  We call this “tax bracket structuring.” This along with many other tax strategies is a proactive approach and often your financial planner is the only one with the information to project your investment income in future years.

About Kevin

Kevin Boutwell is a wealth advisor and partner at Veracity Capital. With a decade of experience in the financial industry, Kevin has acquired expertise in managing equity compensation. He focuses his services on corporate executives who have complicated compensation packages and resulting tax headaches. He believes that proper financial planning drives the best investment decisions, and his customized process and strategies help his clients achieve better outcomes. Kevin prioritizes building meaningful relationships and offers the perfect mix of analytical, problem-solving, and a personal touch so his clients can focus on what’s important while knowing their finances are taken care of. 

Kevin is a highly decorated veteran former U.S. Navy pilot. He got his start in the financial industry at Goldman Sachs and is a CERTIFIED FINANCIAL PLANNER™ practitioner and Certified Investment Management Analyst®. Kevin earned his Bachelor of Science in Mechanical Engineering from the Georgia Institute of Technology and an MBA from Indiana University’s Kelley School of Business. Out of the office, you can find Kevin staying busy with his family, including his young triplet sons. He stays involved with several non-profit veteran organizations and is on the Board of Directors of the Cobb County Public Safety Foundation.  When he has a spare moment, he enjoys staying active with CrossFit and an occasional round of golf. To learn more about Kevin, connect with him on LinkedIn.

Veracity Capital, LLC is not a tax advisory firm and this should not be construed as giving tax advice.  Please consult with your tax advisor before implementing any strategies discussed herein. 

Advisory services offered through Veracity Capital, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.