Tax Planning vs. Financial Planning: Understanding the Difference

You know what they say about life – only two things are certain. Those two things are death and taxes. 

If you make money, the government will expect you to pay your taxes to help fund Social Security, Medicare, schools, roads, and more. You likely already have a good grasp of understanding that you pay taxes. However, today, we’re going to cover tax planning vs. financial planning.

Unfortunately, just 33% of Americans have a written financial plan that can help them:

  • Reach their financial goals
  • Feel confident that they’ll reach their goals

If you don’t know the differences between tax and financial planning, we’re going to outline the major differences, benefits of each, and look at how there’s this powerful intersection between the two.

What’s Tax Planning?

Tax planning keeps more money in your pocket and less money in the government’s hands. When you work with a tax planner, you can expect them to:

Smart tax planning ensures that you never pay more money than necessary in taxes. As a tax planner, the main goal is to use the law to reduce tax burdens as much as possible.

Don’t think people overpay on their taxes?

At the end of 2021, the IRS announced refunds to 11.7 million people totaling $14.4 billion in overpaid taxes. If these individuals had worked with a tax planner, they might have kept a lot more of this money in their pockets and invested it instead.

Note that this number doesn’t include all the money that can be saved through proper tax planning. For example, switching from being taxed as an LLC to being taxed as an S Corporation can equal thousands of dollars in tax savings or more. While tax planning can greatly help you reduce your tax burden, the strategies are often complex. It’s best to work with a professional who understands you and/or your business inside and out in order to recommend the best approach. 

The Benefits of Tax Planning

Individuals and businesses should use tax planning to:

  • Anticipate tax burdens
  • Reduce tax burdens
  • Build wealth
  • Improve their retirement accounts
  • Reduce the risk of tax disputes

When you use tax planning properly, you keep more money in your pocket today which can be used as you wish. For example, maybe you take some of that money to go on vacation and then take another part of it to use on your financial plan.  

What’s Financial Planning?

Financial planning is different from tax planning. Both involve money, but financial planning often goes deeper into your finances. For example, a financial planner will:

  • Gather enough information from you to have a clear picture of your finances
  • Advise you on the best way to reach both your short- and long-term goals

A financial planner wants to build deep relationships with you to assist you with achieving your retirement goals, planning to pay your child’s education, paying for healthcare expenses, or whatever your goals may be.

You deserve to have confidence that your actions today will lead to a more fruitful tomorrow.

Financial planners help guide you to your financial goals. Additionally, these professionals may work with you to devise a financial plan that you’re happy with. In fact, there are many benefits to working with someone to reach your goals.

The Benefits of Financial Planning

Through proper financial planning, you should have an easier time reaching your goals. In fact, just having a financial plan makes people feel more confident. A few of the many benefits of having a financial plan are:

  • Emergency preparedness. Financial planners can help ensure that people have money in emergency situations. Sadly, over 55% of Americans do not have the funds to cover a $1,000 emergency. If a person’s car breaks down, their water heater breaks or they have a significant plumbing issue, these individuals wouldn’t be able to pay for these repairs. Health emergencies would quickly bankrupt most people.
  • Retirement. Planning for retirement is different for everyone. The right plan allows you to retire when you want and with the lifestyle you want to have.
  • Decisions. Is now a good time to invest or buy a house? Your planner can help you answer these questions.
  • Goals. Planners will help you look at the bigger picture to reach your financial goals. These goals may be anything from early retirement to buying a home or paying for your child’s education.

As you can see, working with a financial planner is not the same as working with a tax planner. 

Now that you have a complete understanding of what it means to be a tax and financial planner, it’s time to see how they work together. 

Tax Planning vs. Financial Planning: A Powerful Intersection of Financial Wealth

If you see a tax planner and a financial planner and ask them both, “should you pay off your mortgage?” you may receive two “no” answers. But these answers will be for two different reasons. 

  • The tax planner may mention how you won’t be able to write off mortgage insurance anymore. 
  • The financial planner may say that you should be maxing out your retirement accounts or investing your money, especially if you cashed in on the historically low-interest rates in recent years.

So, tax and financial planning are two completely different things.

But they work together in the perfect intersection that leads to greater financial wealth. For example, you may have a financial plan to:

  • Reach $2 million in retirement accounts
  • Give $1 million to your estate

Of course, your plan is likely much more complex, but these figures illustrate this powerful intersection. If you need to reach $2 million in your investment accounts, minimizing taxes and placing these funds in investments can help you reach your goal.

Additionally, you can begin gifting money to your heirs while you’re alive, tax-free.

For example, if you have four children that you want to leave money to, gift them $16,000 a year and lower the estate’s tax burden when you pass away. 

Financial and tax planners can work together to help you meet your goals, pay less taxes and leave more to your estate in the process. Proper tax planning directly helps with financial planning for:

  • Retirement
  • Investments
  • Gifts and donations
  • So much more

You work hard and deserve to make your money work for you. A financial plan is just one part of the process. When you combine tax and financial planning together, you can maximize your wealth and reach your financial goals in ways that you didn’t know were possible.

Tax planning vs. financial planning are two very different things, but together, they both lead to greater wealth creation for you.

To learn more about how KPN Enterprises can help you with financial planning or to schedule a call, contact us here