One thing that is important to decide as a client searching for tax professionals is whether you need a tax preparer, a tax planner, or a hybrid of the two. As public accounting and wealth advisory firms evolve, the lines between those two titles sometimes get blurred, but let’s clear things up!
Tax Preparation
Tax preparation is a reactive service focused on compliance. It is just what it sounds like – someone who prepares your tax returns. Contrary to popular belief, there is no requirement that one must be a CPA to prepare tax returns. One only needs to apply for an IRS preparer tax identification number (PTIN) to be eligible to prepare returns for compensation.
Regardless of the preparer’s credentials (i.e. PTIN only, EA, or CPA), it’s a good idea to get an understanding of their qualifications and what areas of tax compliance they have the most experience with.
If you have a “simple” tax situation (for example, you get a W-2 and have some mortgage interest), you may just want someone to compile your tax forms and make sure everything is reported correctly. It’s important to note that when you hire a tax preparer, the cost for their services is unlikely to include “free advice” outside of filing your returns correctly. It’s a good idea to check your engagement letter (or ask your preparer) for what services are included with the fees you pay so that you are aware of what additional costs you may incur for work that is performed outside the scope of filing your returns.
Tax Planning
Tax planning is a proactive service. In many cases, tax planners also prepare returns (most of our clients at Gray Stripes engage us for planning and preparation).
Do you find yourself getting frustrated at a tax bill every April that you haven’t budgeted for?
Are you a business owner and are lost at the tax opportunities and complexities of your specific company?
Are you a DIY investor who needs guidance on the tax consequences of transactions within your portfolio?
Are you a high-income earner with variable compensation that you struggle to understand?
Those are a few of the most common client profiles we encounter that would benefit tremendously from tax planning. However, it is a myth that “simple” taxpayers can’t benefit from tax planning even if they don’t have the complexity of a business owner or someone with a lot of unique portfolio holdings.
At its core, good tax planning accomplishes two things:
- Mitigating lifetime taxes, and
- Avoiding surprises when returns are filed each year.
Since tax planning is a “year-round sport” rather than a once-a-year process, it will cost more than simply filing a return. However, it’s very likely that the lifetime taxes saved from good tax planning will far exceed the fees paid for the planning itself.