Tax Prep vs Tax Planning vs Tax Strategy Explained

Because it looks backward, you file cleanly, but it doesn't change your future bill.

It is often reactive and late in the year. By then, many opportunities are gone.

Proactive, forward-looking design across the nine CLEAR EDGE pillars that reduces taxes year after year.

No. If you pay $50k or more in taxes, a strategy can save you real money.

No. Keep your CPA for compliance. Add a tax strategist for proactive planning.

Intro: If you paid more than $50,000 in taxes last year, you are in the right place. This is the tax reduction podcast powered by Make Taxes Fair. Hosted by tax strategist Chris Middleton, the show is designed for business owners who want to stop overpaying the IRS and keep more of their hard earned money. Every episode delivers targeted tax advice you can use to cut your tax bill and put more cash back into your business. No fluff, no gimmicks, just proven strategies most accountants never share.

Now here's your host, Chris Middleton.

Chris Middleton: Here's a tough but honest question. Is your CPA actually helping you reduce your taxes, or are they just filing your paperwork? Because if all they're doing is tax preparation and you think you're getting tax strategy, you could be overpaying the IRS by tens of thousands of dollars. And the worst part is you may not even realize it, and it's not your fault. Let me explain why.

Today, we're gonna break down three terms that sound very similar but have totally different meanings. First is tax preparation. The next is tax planning, and the last is tax strategy. If you understand the difference between these three, you can take total control of your tax outcome both legally and ethically. So let's get into it.

First up is tax preparation. This is what most CPAs do. It's the act of collecting your documents, putting the right numbers in the right boxes on the right forms, and filing your return with the government, the IRS, and the state. Preparation or what's called compliance is vitally important. Of course, we wanna do things the right way, but it's also looking in the rearview mirror.

We're looking backwards. Right? It tells a story of what's already happened, but it doesn't necessarily change the ending. You hand your numbers over to your CPA. They organize the information, calculate what you owe, and that's it.

There's usually not much either time to do forward thinking because if you're doing this in the middle of tax season or approaching a tax deadline, there's no time to talk about the future. There's no custom guidance given, and there's certainly no plan to reduce your future tax bill or do better than what we're doing now. The bottom line is tax preparation is about compliance, putting the right numbers in the right boxes to get an accurate result, not savings. If that's all you're relying on, you're documenting your overpayment, not fixing it. End of story.

The next definition is tax planning. Let's talk about that. This is a step above tax preparation, and it's something that some CPAs are able to successfully offer and execute on. Planning involves looking at your current year and saying, okay. Based on how things are going, here's what your tax bill might look like at the end of the year, and here's how to avoid any nasty surprises.

So maybe your CPA suggests a last minute contribution to your IRA or maxing out your retirement plan or some end of your purchases to boost your deductions. Right? Take advantage of bonus depreciation or something like that. That's better than doing nothing, but it's often too little too late. Why?

Most tax planning is reactive and happens in the fourth quarter when more than 75% of the year is gone and likely 100% of your budget is already spent or allocated towards resources for your business. So by the time the fourth quarter rolls around, it's likely too late. And again, this is only focusing on this year. Tax planning helps to avoid panic, but it rarely creates permanent change. This is where tax strategy comes into play.

Tax strategy is forward thinking. It's intentional. It's designed to minimize your tax burden both now and also over a period of time. This is where we like to live in and make taxes fair. This is where most CPAs don't go.

With tax strategy, we use the tax code as a tool, not as a threat. How we use that is through the clear edge framework where we're able to evaluate your business for credits, tax credits you should be taking advantage of, legal structure, evaluating your legal structure for tax impact, employees, which is finding, retaining, and rewarding employees through the tax code accumulation of wealth, building wealth in tax advantage ways retirement planning, planning for retirement in tax advantage ways exit planning, minimizing the tax bite when you exit a business or another highly appreciated asset that you've built. Deduction optimization, confidently making sure that you're optimizing your deductions and ultimately efficiency, implementing tax strategies with systems that yield results year after year after year. Using the ClearEdge framework as our guide, we deliver tax strategy to you by evaluating how is your business structured and are there any changes to your business. This is something that can be done each and every quarter.

Is your business growing? Is there a way that we need to offshoot a segment of your business into a new entity? Are we currently optimized with your legal structure? What fringe benefits should you be using? Maybe we've evaluated your business and said, hey.

Here are some clear edge framework type fringe benefits that you could be using, but your cash flow wasn't quite there, and we opted to implement other strategies. So using the ClearEdge framework to revisit your business and look at how your business has grown gives us the opportunity to say, hey. Was there something that we didn't fully execute in the past that we could now? And are you eligible for credits? Right?

Looking for credits that nobody has mentioned to you before. Yeah. This is where the clear edge framework comes into play. Maybe you're hiring now whereas you weren't in the past. So the workers opportunity tax credit could be a factor for you because you're expanding your team whereas before you weren't.

Vitally important that you examine your situation through that framework that allows us to make sure that you're fully optimized. What is the trajectory of your business growth? Have changes happened since you last had your business run through a framework like the ClearEdge framework. We don't just look at what has happened, we design what happens next. That's tax strategy, and that's the difference between paying what you owe and leaving a tip to the government and overpaying by default.

Let me show you what this looks like in a real world example. Right? A client of ours we had, we call him Mark, had a consulting business that he was running. With the ClearEdge framework, we were able to actively work with his tax situation and cut his tax bill by almost 65%, again using the ClearEdge framework and specifically the pillars of credits. We found tax credits that he wasn't using.

Legal structure, we helped him tune up his legal structure for his business and fully leverage his S corporation. Employees to reward and retain his employees, retirement planning, bringing light to how his current retirement plan situation would help him reduce taxes, and deduction optimization. Right? We found him write offs that he had just flat out been missing. So it's only five of the nine pillars, and we cut his tax bill by almost 65%.

Fast forward almost two years later, his business model had shifted, and he was spending less of his time in his own business. The business was almost running itself and Mark wanted to do other things with his time. So he started another business with his best friend. That's not uncommon for entrepreneurs to have more than one business venture going on. With this new venture, additional tax savings were found using the same five pillars credits, legal structure, employees, retirement planning, and deduction optimization But in addition, we're also able to apply the new pillar of exit planning with a strategy to help him structure the business the right way on the front end to be able to exit the business tax free if certain criteria were met.

Given that they had projected the exit of the business to be between 6 to $10,000,000 in the next five years per partner, they were building up to that kind of valuation and exit. The clear edge framework and thinking proactively about the exit of the business will end up saving Mark in the neighborhood of about 2 and a half million dollars in taxes because we were able to strategize for the future. That's the power of strategy and thinking proactively. Let's address a couple of myths around tax strategy, right? Because these things come up frequently.

Myth number one, my CPA handles everything. Well, if you're not meeting with your accountant more than once a year at tax filings, they cannot be up to date on what's happening in your business nor can they be proactively bringing you tax strategies throughout the year. They just don't know enough about what's going on right now and what's the trajectory. The scope of their activities preparing the tax return, which is, again, vitally important, but that is not tax strategy. Therefore, they can't be giving you tax advice that addresses the future.

Myth number two, I don't make enough money to need tax strategy. So if you're earning 50,000 or more in net profit, you absolutely qualify for tax strategies that will reduce things like self employment tax, income tax, and help you build wealth. In fact, it's this foundational level where if you install tax strategy and the tax strategy mindset, you can actually reap rewards for years to come as you grow your business. There's never a wrong time to talk about tax savings, and the foundation is a great time. It's even a better time, unfortunately, if you've been wasting money on taxes for years, it's always a good time to talk about tax planning and strategy in terms of paying less to the government if you've grown to that point.

But foundationally is a great time to start talking and planning and implementing tax strategies. Myth number three, tax strategies for the rich. Well, the rich become rich by using strategies early and often. You don't have to wait. And paying the ignorance tax overpaying them taxes because you don't know what you could be implementing in your business is wasteful.

You don't have to be spending that money when you can be building your wealth, your family, your business instead of paying the government. Myth number four, tax strategy is too complicated. It can seem overwhelming. I get it. But the answer is no.

It does not have to be overwhelming when you have a system like our ClearEdge framework and our FIRE method to walk you through one pillar at a time what you need to do to optimize your taxes. So let's break this down. Tax preparation is paperwork. Right? Tax planning is really prediction and where we think we're gonna end the year and what can we do to mitigate that.

Tax strategy is an overarching plan that the elements when put in place can benefit you year over year over year. Preparation keeps you compliant. Planning avoids surprises. Strategy builds wealth and protects your profits. If you're serious about growing your business and keeping more of what you earn, you cannot rely on tax prep alone.

You need a proactive system when this ethical, audit proof, and built to win. In our next episode, we're gonna be tackling one of the most common and most expensive tax mistakes that I see and we see in the profession, choosing the wrong legal structure. If you're operating as a sole proprietor or an LLC taxed as a disregarded entity or a partnership, you may be paying way more in self employment tax than you should. We're gonna break down s corporations, LLCs, and c corporations, and show you how to kinda know what is right for your business. So be sure to hit follow or subscribe so you don't miss that.

And if you wanna know right now whether your current setup is costing you money with your relationship with your CPA, go to the taxreductionpodcast.com. Again, the taxreductionpodcast.com, and download our free tax strategy conversation guide that will help you have a conversation with yourself to evaluate. Do you have a proactive tax strategist, or do you have a happy historian who's helping you with your taxes? It's one checklist, a few minutes of your time, real answers. And, hey, if this episode made you think, hey, I need this, do a fellow business owner a favor.

Share this with a friend because friends don't let friends overpay the government. Thank you as always for being here. Goodbye for now.

Intro: That was today's play on the Tax Reduction Podcast with Chris Middleton. For step by step checklists, examples, and access to the tax savings communities, visit www.thetaxreductionpodcast.com. And remember, if you found this helpful, share this with a friend. Because friends don't let friends overpay the government. Don't give a massive tip to the IRS every year.

Keep more of what you earn and join us next time on the Tax Reduction Podcast.