Planning is an essential part of life. Like the popular quote, “If you fail to plan, then you have planned to fail.”
I bet it is not an easy task waking up every morning to your job, and neither is it always exciting to manage a startup. Nevertheless, you keep on grinding. You are at that job or running that business because you want a better life for yourself and your family.
As good as hard work is, smart work is far better. As exciting as making wealth is, effective wealth management is beneficial. This is to say, your hard work and sacrifices will only be worth it if you can achieve your goal(s) with the money you make.
Generally, financial planning, including tax planning, is essential in helping you build an effective and efficient action plan for financial health. Financial planning and income tax planning are pivotal to any business’s success and your future financial success. This is to say that a good understanding of tax planning and financial planning and their differences will help your overall financial life.
Many people think that tax and financial planning mean the same, but this is not true. Although the two terms are closely related, they are pretty different. Inability to differentiate between these two and treat each as deserved may cause some strain on finances or business.
According to the Certified Financial Planner Board of Standards, financial planning can be defined as a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances. Simply put, financial planning is an in-depth analysis of your current finances, financial goals, and any strategies you’ve devised to achieve those goals.
Should you be one of those who cannot give a detailed account of your income(s) and expenditures, a solid understanding of financial planning can assist you in developing good plans to achieve your goals through effective financial management. With proper financial planning in place, you can understand your income and cash flow; build more capital; maximize your spending and budget, and improve your family’s finances.
On the other hand, tax planning is a process of implementing different plans to minimize the cost of taxes paid. Tax planning will help you analyze your financial plan to make sure that all the steps in your plan work well together to produce excellent results.
Knowing and understanding tax planning can help you avoid paying too much in taxes which could be the cause of the setbacks you’ve experienced in your finances or business. Since taxes are unavoidable (remember that the support for the country’s social, economic, and public infrastructure as well as education are gotten from taxes), you should plan for it to avoid a problem with the government in the future.
If you are a business owner, you will be responsible for paying different taxes, including business tax. It is, therefore, advisable to get an IRS tax preparer, more advisable, a tax professional such as an Enrolled Agent that can help you with your business tax planning. Not only is this a better option than doing it yourself, but it will also save you from getting into trouble with the IRS.
Having explained what each term (financial planning and tax planning) stands for, let’s look at some of their differences.
Differences
Financial planning helps you manage your finances effectively, while tax planning provides strategies that help you pay the lowest taxes possible.
Financial planning enables you to increase the money you save for investment, while tax planning reveals the right places to invest the money that will help you reduce your taxable income.
Financial planning helps create steps to achieve your financial goals and gives you peace of mind knowing your money is secure. Tax planning enables you to get the benefits of taxes like getting credits on your tax returns and health insurance, and access to government benefits.
Financial planning will help you understand your income and current cash flows to build better capital and improve your overall finances. In contrast, tax planning enables you to reduce tax liability and make it possible for you to pay the lowest taxes by avoiding some unnecessary ones.
Note: tax planning is a significant and essential part of financial planning, even though their function differs. You must also understand that tax planning is legal; it is not cutting corners or attempting to bribe your way through.
To sum up, to enjoy the benefit of financial planning, which includes achieving financial goals, improved standard of living, financial security, etc., you have to start that financial planning, which provides for tax planning. Remember that tax planning and financial planning go hand-in-hand; You cannot claim to have an excellent financial plan without planning your taxes.
