Tax Planning vs. Tax Compliance

With tax season underway, many are scrambling to track down all the various statements and forms to send off to their CPA. They are hoping to get good news that they don’t have to make an unexpected payment as part of their filing. Often, people are left upset or confused at the results, but ultimately sweep it under the rug until tax season rolls around again the next year. As a former tax preparer, I can relate to the mad dash this time each year.

To make this annual ritual even more challenging, the accounting profession as a whole has recently experienced increased strain due to factors like 1) aging accountants nearing retirement, 2) a declining number of candidates sitting for the CPA exam, 3) decreased enrollment in accounting programs, and 4) an overall perception of poor work-life balance.

What ends up happening in many scenarios is people hope for proactive tax planning to lessen their bill as part of their filing, but due to the time and resource constraints around tax season, they understandably only get tax compliance. While both are equally important, there is a difference between the two.

What is Tax Compliance?

This is what happens in the spring for most folks, and again in the fall for those of us who extend our tax return. Tax compliance means accurately following all the rules and deadlines that the IRS and other taxing authorities enforce. These laws are very complex as evidenced by thick volumes of tax code with thousands of pages, along with thousands of more pages of regulations interpreting that tax code. Additionally, these laws constantly change! This is why many of us choose to pay a tax preparer to help file our tax return – it gives peace of mind that all the applicable rules are being followed so that the IRS doesn’t come knocking.

What is Tax Planning?

Tax planning happens year-round. It is more proactive and forward thinking than reactive and backward thinking. The main goal is to minimize your overall taxes now and in the future. Some areas of tax planning include:

• Business Entity Choice – A business can be conducted as a C corporation, S corporation, various forms of partnership, sole proprietorship, or LLC. For those that operate as an LLC, you choose to be taxed as a sole proprietorship, corporation, or partnership. Each structure has pros and cons from a tax perspective, depending on your business.
• Tax-Efficient Charitable Giving – There are various tax-efficient strategies for those who are charitably inclined. Some common ones include charitable “bunching” facilitated by a Donor-Advised Fund, donating appreciated securities to avoid unrealized capital gains, making Qualified Charitable Distributions from your IRA, and setting up a charitable trust like a Charitable Remainder Trust or Charitable Lead Trust. 
• Roth Conversions – These often makes sense for folks who are in a relatively low tax bracket. Imagine getting a tax deduction while you are in a high bracket, then converting those dollars into a Roth account (never to be taxed again) while in a lower tax bracket! 
• Tax-Loss Harvesting and Capital Gain Harvesting – These are terms used to describe proactively realizing capital losses (or gains) from your investment portfolio to minimize your current or future tax bill.
• Retirement Plan Choice – For business owners, consider opening a SEP IRA, Solo 401k, or a standard company retirement plan, for additional tax deferrals or Roth contributions. 
• Business / Rental Property Deductions – Depending on your business and its setup, there can be significant deductions to offset income to minimize your tax bill, depreciation being a common one. Rules around these deductions are very complex.
• Estate and Wealth Transfer – Currently, the federal estate tax exemption is $13.99 million per individual before estate tax (40%) would apply. For those with a current or expected estate tax exposure, there are various strategies to reduce the amount of property inside your taxable estate, while ensuring your own and others’ financial security.
• Education Savings – For those with education goals, tax-effective savings to fund future expenses can often be accomplished while getting a state tax deduction (in some states) using a 529 Plan. These accounts can also be used as a wealth transfer tool that allows for tax-free gifting of up to 5 years’ worth of annual gift exclusions (in 2025, up to $19,000 x 5) at once.
• Retirement Distribution Strategies – There is a method to tax-efficiently drawing on your assets in retirement. The right approach depends on a number of things, including your retirement age, life expectancy, charitable intent, legacy goals, size of taxable account, amount of unrealized long-term capital gains, size of tax-deferred accounts, annual living expenses, and other income sources.
• Investment Account Contribution Types – There are three common investment account types, each offering different tax advantages: tax-deferred, taxable, and tax-free. Which one(s) you prioritize depends on your unique circumstance.

While not all financial advisers are authorized to give tax advice around complex and legal tax-minimization strategies for compliance purposes – this is specifically reserved for CPAs, Enrolled Agents, and Tax Attorneys – advisers can participate in year-round tax planning and should coordinate together with you and your tax preparer.

Summary

Tax compliance and tax planning are both essential to keeping more of what you earn. You wouldn’t want the best strategy without accurately filing / executing that plan. You also wouldn’t want to prioritize only the accuracy of your tax return filing, but leave money on the table where some tax planning could’ve provided value. 

Taxes are a critical component to virtually every financial planning topic (investments, retirement, insurance, estate planning, etc.). Coming up with a plan around these topics and their tax impact should not be solely reserved for discussion around the 4/15 filing deadline. While not tax preparers ourselves, we have taxes on our mind all throughout the year, not just in the spring. Let’s join forces with your tax preparer to make sure you are getting both tax planning and compliance. 

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