Costly Confusion: 

I can think of a dozen situations, just this year, when our current or potential clients confused tax preparation and tax planning.

If you don’t have a clear understanding of the difference between the two, it will likely cost you a significant amount in tax overpayments in the long run.

It can be $10,000s or even $100,000s depending on your circumstances, so please keep reading. 

Just to be clear, I’m not making any blanket statements about the entire tax preparation industry.

I only want you to be aware of how it works in some cases. It’s entirely possible that your relationship with your CPA is very different!

So what should you be aware of?

During tax season, many accounting firms prioritize tax compliance instead of tax planning. To say this in simple terms, they just want to make sure you don’t get in trouble with the IRS. Minimizing your tax bill is not always their priority. I know this will sound bizarre to some of you, but it’s true.

Please keep in mind that some tax firms prepare thousands of tax returns each season. Given industry-wide staff shortages, it’s not uncommon for each tax return to be reviewed for only 15 to 30 minutes. It’s hard to do much planning when you have so little time…

(By the way, think of this “assembly line” approach just like a financial planner plugging your data into software and calling it a “financial plan.”) 

One example that comes to mind is one of our new clients earlier this year. Given her large medical deductions, she ended up in a negative tax situation over the past three years. Her CPA didn’t even bring up the idea of accelerated IRA distributions or tax gain harvesting which would be ideal for her going forward…

Now, even if your tax person does have the knowledge and time to do the tax planning part for you, they still need to understand your overall situation and goals. As a simple example, even if two people are in the same situation tax-wise, each of them may take a very different approach when it comes to strategies such as Roth conversions.

So what should you do about this?

If you are not sure if your CPA is actually helping you minimize your taxes, you can simply ask what needs to happen to accomplish this goal.

Their response is important. If they offer you some planning work throughout the year, usually for an additional fee, these proactive services can be of value to you. If you get a short response that essentially directs you to reach out next year, you may want to consider looking for a new tax preparer.

In my opinion, your financial planner or advisor should be the one bringing up different tax minimization opportunities in your periodic meetings. Your financial planner usually knows much more about your overall situation and should be able to point out different ideas.

Once these opportunities have been identified, it can be beneficial to collaborate with a CPA to implement the strategy.

So, I hope you will not miss out on thousands in potential tax savings by misunderstanding the difference between tax prep and tax planning!