Tax Planning vs. Tax Preparation


When it comes to minimizing taxes, it could be advantageous to work with a fiduciary advisor along with an accountant or CPA when creating a tax plan that’s right for you. A fiduciary advisor will review your tax and financial documents, evaluate your current financial situation, and design a plan that is tax wise with your dollars. No matter which income bracket you are in, you may benefit from taking a proactive approach to the upcoming tax season. Let’s take a look at four tax planning tips for 2021.

  1. Understand the Difference Between Tax Planning and Tax Preparation

Tax planning is very different from tax preparation. Many people make the mistake of thinking that by working with an accountant or CPA, that they are taking the right steps in securing their retirement plan. An accountant or CPA can offer services in tax preparation and the filing of your tax return but may not always add the same value that a fiduciary advisor can bring in creating a tax plan specific to your situation.

By working with a financial advisor on your tax plan, you can:

  • Collaboratively assess your current financial situation.
  • Forecast out the moves that could make your retirement as efficient as it can be.
  • Help avoid any tax surprises.
  1. Consider Different Types of Investments

Depending upon the types of investments you own, you may want to consider owning taxable bonds, real estate, investment trusts, and even actively managed funds in your portfolio through your tax qualified accounts due to the ordinary income taxes that typically incur with these types of investments.

Some other options worth considering are owning individual stocks that you plan on holding longer than 12 months, passive index funds that are more buy and hold, or municipal bonds in a taxable account to take advantage of potentially lower capital gains tax rates.

  1. Understand How Your Withdrawals Are Being Taxed

Everyone is going to need some withdrawals from their investments at some point whether that is for a car purchase, home, renovation, etc.  Depending upon the type of account, there may be rules of how long the account is established before you take withdrawals along with taxes and penalties around the withdrawal itself.

For many people, deciding which account to withdrawal from and when can be quite challenging.  It could cost you more in taxes if not done correctly.  By working with a financial advisor that considers taxes, you can create a plan that will enable you to be tax wise with your dollars.

  1. Have a Plan for Combined Income

If you are interested in taking out distributions during the third and fourth quarters for the holidays or year-end planned gifts, it’s important to be mindful of those distributions because it could affect your overall income and taxes as well.

By creating that tax plan, you may have a better understanding of distributions on your bottom line after taxes are considered.  A tax wise financial advisor may help you avoid any tax surprises that many mistakenly face when they receive their 1099’s the following year.

If you are unsure whether tax planning is right for you, consider talking with a financial advisor at Financial Dynamics and Associates Inc.  As a firm focused on these issues in the Midlothian and Richmond, VA metro area, we may able to help advise you based on your overall financial situation and goals.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser. This information is not intended as a solicitation or an offer to buy or sell any security or investment product.. Advisory Services offered through J. W. Cole Advisors, Inc (JWCA). Financial Dynamics & Assoc. Inc and JWCA are unaffiliated entities.

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