Tax Planning vs. Tax Preparation: What's the Difference? (2024)

This week, we’re chatting with Danielle McCarthy, CPA, MST from Perelson Weiner LLP, a leading advisory and full-service accounting firm on Harness Wealth. Many filers whose tax situations have recently evolved are often confused about the differences between tax planning and tax preparation services, as well as the pros and cons of filing on your own vs. working with a CPA at all.

Below are Danielle’s recommendations to help you select the approach that best suits your financial situation. She also provides her expert perspective on specific time-sensitive tax opportunities and pitfalls to keep in mind, both this year and next.

Please tell us about Perelson Weiner and your work there.

Perelson Weiner LLP, is a New York City based Certified Public Accounting firm that is dedicated to making a difference for its clients through our involvement in our clients’ personal and professional lives. As CPAs and trusted advisors, we are extensively involved in our clients’ personal, professional, business, philanthropic and estate planning aspects of their lives. The Firm was recently recognized by Forbes as one of America’s Top Recommended Tax and Accounting Firms.

I started with Perelson Weiner approximately three years ago as a Manager in the Tax Department and I have over 10 years of experience providing tax and advisory services to high net worth individuals and entrepreneurs. I have extensive experience working with a diverse clientele, including hedge fund and private equity managers to families with legacy wealth. I truly enjoy what I do and it brings me great pride knowing I have become a trusted advisor to my clients.

What is “tax planning”? What does long-term tax planning look like?

Tax planning is effectively managing a taxpayer’s financial situation to minimize the tax burden at the federal and state level for both the near and long-term.

Tax planning could be simple, such as making sure a taxpayer has enough withholdings to avoid tax estimate underpayment penalties, to incredibly complex scenarios, for example planning for a capital liquidation event. Long-term planning often involves ongoing discussions with clients about their long-term goals and what they hope to achieve with their wealth. It often includes working with families to capitalize on the increased estate tax exemption.

Under the Tax Cuts and Jobs Act, the maximum federal tax rate is 37%. This does not include the 3.8% “Obamacare” tax on net investment income. When factoring in certain state (and city) taxes, over 50% of a client’s taxable income could go towards paying federal and state tax liabilities. Additionally, the federal estate tax has a maximum tax rate of 40%. Without proper planning, the amount left to one’s heirs could be greatly diminished.

For our high-net-worth clients, we often have discussions about whether a Donor Advised Fund (DAF) or a private foundation is more in line with their charitable goals. Both are beneficial, but taxpayers who want to involve their family with charitable giving or exert more control over decisions are more inclined to establish a private foundation. It’s important to note that long-term tax planning is truly a team effort. Working together with attorneys, wealth advisors, and executive-level employees most often results in the optimal tax structuring of a taxpayer’s financial situation.

Which types of people and situations would benefit most from tax planning?

Any taxpayer would benefit from tax planning, but the most opportunities arise for those taxpayers who have a more sophisticated financial picture. Taxpayers who have an interest in pass-through entities (partnerships or S-Corporations) or are beneficiaries of trusts are just some types of taxpayers who could benefit greatly from proper tax planning.

We regularly complete analyses of whether it’s beneficial for a trust to make a distribution to a beneficiary (thereby passing out income to the recipient) or to have the income remain within the trust and to be taxed at the trust level.

The trust income tax brackets are much more compressed than those of individual taxpayers, meaning a trust reaches the maximum 37% federal income tax bracket much quicker than an individual taxpayer. If a trust’s income will be taxed at 37% for federal income tax purposes, but the beneficiary is in a lower tax bracket (say 32% for federal income tax purposes), there is an opportunity to minimize the tax impact on that income.

It’s also important to know that a trust could make a distribution 65 days after year-end and have it “count” as a distribution for the preceding tax year. We recently completed this analysis for a client, which resulted in substantial federal and state tax savings.

What if I just file my taxes once a year? What opportunities or deadlines am I missing out on?

Taxpayers could lose out on tax planning opportunities by dealing with taxes only when tax season comes around. Why give Uncle Sam more when there are ways to manage and to plan for a taxpayer’s financial and tax situation more effectively? At Perelson Weiner, we are in constant contact with our clients about personal situations that arise as well as updating them on the new tax laws (the last few years have been very busy with all the changes created from the Tax Cuts and Jobs Act).

Under the Tax Cuts and Jobs Act, one of the most talked about provisions pertains to Qualified Opportunity Funds (QOFs). The tax benefits associated with investing capital gains in a QOF could be very favorable to taxpayers. A taxpayer could defer capital gains (either long-term or short-term) during the tax year if the funds are invested in a QOF. However, taxpayers have 180 days from the date of sale to invest in a QOF to obtain the beneficial provisions of the law.

If the taxpayer waits until the following April to complete or even to begin thinking about their taxes, they potentially lose out on this tax opportunity. This is just one example of the benefits a CPA or being in contact with your CPA on an ongoing basis can bring to a taxpayer.

What are some tax planning steps an individual can take on their own?

Tax planning does not have to be intimidating. If a taxpayer is comfortable managing their own investment portfolio, they might be able to self-review their unrealized losses regularly and determine whether it’s worthwhile to realize losses and mitigate any recognized gains. Taxpayers could also decide to “bundle” charitable contributions in a given tax year in order to maximize itemized deductions.

With the $10,000 cap on state and local tax deductions under the Tax Cuts and Jobs Act, many taxpayers found it was more beneficial to take the increased standard deduction rather than itemize deductions. Bundling charitable contributions is one way in which a taxpayer could increase their itemized deductions.

As a result of the Tax Cuts and Jobs Act, business owners taxes became increasingly ripe with opportunity for proactive tax planning. With the Qualified Business Income (199A) Deduction and certain state “workarounds” on the $10,000 State and Local Tax limitation, CPAs can speak to the ways to approach these planning opportunities and assist clients in enacting them.

In what ways can a CPA be helpful?

For taxpayers with a diverse portfolio, CPAs look at the entire picture and determine ways in which a taxpayer could minimize their tax burden, not only for income taxes, but for estate and gift tax purposes as well. At Perelson Weiner, we take an active approach in maintaining client relationships.

For example, I’ve had clients tell me they’re expecting their first child and that gives me a chance to talk about some of the opportunities available, such as having a wealthy grandparent directly pay the medical expenses (there are no gift tax consequences for the grandparent if the bill is paid directly to the medical institution) or discussing the benefits (and state by state differences) of opening up a College Savings Plan (529).

CPAs and financial advisors are available to help taxpayers achieve their financial goals and proper tax planning is one way for this to be accomplished. At Perelson Weiner, we are trusted advisors to our clients and we strive to always make a positive influence in their lives.

I am Danielle McCarthy, a Certified Public Accountant (CPA) and Manager in the Tax Department at Perelson Weiner LLP, a prominent Certified Public Accounting firm based in New York City. With over 10 years of experience in providing tax and advisory services to high net worth individuals and entrepreneurs, I have become a trusted advisor to a diverse clientele, including hedge fund and private equity managers to families with legacy wealth. My expertise has been recognized by Forbes, which recently listed Perelson Weiner LLP as one of America's Top Recommended Tax and Accounting Firms.

Now, let's delve into the concepts discussed in the article:

1. Perelson Weiner LLP:

  • Expertise: Perelson Weiner LLP is a New York City-based Certified Public Accounting firm dedicated to making a difference for clients through involvement in their personal and professional lives.
  • Recognition: Forbes has acknowledged the firm as one of America's Top Recommended Tax and Accounting Firms.

2. Tax Planning:

  • Definition: Tax planning involves effectively managing a taxpayer's financial situation to minimize the tax burden at the federal and state levels for both the near and long-term.
  • Long-Term Planning: Involves ongoing discussions with clients about their long-term goals, working with families to capitalize on increased estate tax exemptions, and addressing complex scenarios like planning for capital events.
  • Tax Rates: Highlights the impact of federal and state tax rates, including the 3.8% "Obamacare" tax on net investment income.

3. High-Net-Worth Clients and Charitable Giving:

  • Donor Advised Fund (DAF) vs. Private Foundation: Discusses considerations for high-net-worth clients regarding whether a Donor Advised Fund (DAF) or a private foundation aligns better with their charitable goals.

4. Types of People Benefiting from Tax Planning:

  • Opportunities: Any taxpayer benefits, but opportunities are more significant for those with a sophisticated financial picture, involvement in pass-through entities, or as beneficiaries of trusts.

5. Filing Frequency and Tax Planning Opportunities:

  • Loss of Opportunities: Advises against dealing with taxes only during tax season, emphasizing the loss of potential tax planning opportunities.
  • Qualified Opportunity Funds (QOFs): Highlights time-sensitive opportunities, like investing in QOFs, and the 180-day window for tax benefits.

6. Individual Tax Planning Steps:

  • Self-Review: Encourages individuals to self-review unrealized losses regularly and consider realizing losses to mitigate recognized gains.
  • Charitable Contributions: Suggests bundling charitable contributions to maximize itemized deductions, especially with the cap on state and local tax deductions.

7. Role of CPA:

  • Comprehensive Approach: CPAs look at the entire financial picture to minimize tax burden for income, estate, and gift tax purposes.
  • Active Client Relationships: Highlights the active role CPAs play in maintaining client relationships, providing personalized advice based on individual situations.

8. Financial Goals and Tax Planning:

  • Diverse Portfolio: CPAs assist taxpayers in minimizing tax burdens for income, estate, and gift tax purposes, considering the entire financial picture.
  • Examples: Shares examples of advising clients on opportunities like paying medical expenses directly and discussing College Savings Plans.

In conclusion, effective tax planning is a crucial aspect of financial management, and seeking the expertise of a CPA, like those at Perelson Weiner LLP, can significantly benefit individuals and businesses in navigating the complexities of the tax landscape.

Tax Planning vs. Tax Preparation: What's the Difference? (2024)
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