Tax Preparation vs. Tax Planning

How do we really make an impact on our tax return?

Tax day is April 18 this year, and I want to talk about the difference between tax preparations versus tax planning.

Tax preparation is what we do this time of year. We look into the past on things that already happened last year – 2015 – and then we want to use deductions and credits, exemptions, exclusions to try and minimize our tax bill.

But what happened has happened. If you took a distribution from your IRA in November of last year, and you decide you wished you hadn’t done that because you got a 1099 at the end of the year and it’s a taxable distribution. You can’t get that Jack back in the box. You could have if you’d done it within 60 days but now it’s too late. So you think what can I do? You can’t do anything on numbers that already happened last year.

Tax planning is very different. Tax planning is looking to the future and saying how much do I want to show up on a 1099. It’s being very intentional about the taxes that you pay. In retirement, that becomes critically important because we have a choice of where we draw our income from to supplement Social Security and possibly a pension.

What is the taxable effect of where you pull your income from? If I just go down to the bank and pull out $1,000 from my checking account or a CD, it doesn’t generate a 1099. I’ve already paid a tax on all that money. But if I go to my IRA and pull it out, it does generate a 1099.

Tax planning, in my opinion, is infinitely more powerful in saving taxes than tax preparation because you’re proactively doing something about it and being intentional.  When you are in your 60s is when you can really be effective at tax planning and being intentional about what do you pay today versus what you pay tomorrow.

We should always be intentional about our taxes, and tax planning is looking to the future. We can really make an impact in your long-term tax planning.