What is the difference between tax planning and tax compliance?

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Did you know when you’re getting ready for tax season, there are two types of preparation methods?

Knowing the difference between tax compliance and tax planning could influence how long it will it take to do a return, determine whether it’s more convenient to file online, or see if a professional is needed.

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Here’s a breakdown of the differences, according to the website Above The Canopy.

Tax compliance

This is essentially looking at income and transactions that have already happened. It’s primarily focused during the spring, when income tax returns have to be filed.

Items such as W-2 income from an employer, rent credits or 401k contributions are examples that fall more under tax compliance. As long as it’s fairly straightforward, tax compliance items can be done online pretty easily.

This is a popular option for people whose only income is from an employer or minor investments.

Tax planning

This is a little more complicated and more focused year-round, instead of simply when it’s time to file in the spring.

Tax planning revolves around several types of transactions that are about to happen, and minimizing what is owed under a wider umbrella.

For example, owners of businesses, homes, rental properties, and other special investments often are often better off consulting a professional to sort through all their transactions.

Individuals with education savings and capital gains opportunities, or businesses with hiring incentives, export incentives or special credits, would fall more under the category of tax planning.

When focused more on tax planning, it’s good to plan by the fall of the year in question to give a professional time to put together strategies.

If you’re still asking yourself which decision is better for you, check out our graphic below to see what suggestion we have for you.

About the Authors

Keith is a member of Graham Media Group's Digital Content Team, which produces content for all the company's news websites.

Dawn Jorgenson, Graham Media Group Branded Content Managing Editor, began working with the group in April 2013. She graduated from Texas State University with a degree in electronic media.

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