Tax Planning vs. Tax Preparation: Why Filing a Return Isn’t a Strategy

Short answer: Tax preparation reports what already happened. Tax planning changes what happens next. By the time your documents hit a preparer’s desk in February, almost every decision that moved your bill has already been made. Planning is the work you do while you can still change the outcome.

I do both at Pasquesi Partners. But the return is the byproduct. The planning is the job.

What is the difference between tax preparation and tax planning?

Tax preparation means accurately reporting income and deductions for a year that’s already closed. It has a deadline, a set of forms, and very little room for judgment. That’s not a knock on it. Getting a complicated return right is real work, and plenty of returns come to me with errors baked in from prior years.

But preparation can’t answer the question most people actually have, which is “am I paying more than I need to?” That question gets answered before December 31, not after.

Here’s the version I give people at parties: your preparer writes the history. Your planner is still holding the pen.

Who actually needs tax planning?

Planning pays off when your situation has parts you can move. If you have a single W-2, take the standard deduction, and nothing changed this year, there may be nothing for me to do. I’ll tell you that rather than sell you a service.

But if any of the following are true, there’s almost certainly money on the table:

You own a business, and things like entity choice, your own compensation, and the timing of income and expenses are decisions rather than facts. You get paid in equity, whether that’s options, RSUs, or founder stock. You’re sitting on appreciated assets. You give to charity. You have kids. Or your income swings from year to year, which is the single biggest planning opportunity most people never think about.

That last one comes up constantly and gets ignored constantly. A year where your income drops is not just a bad year. It’s a window.

Tax planning for business owners

What entity structure should my business use?

I don’t have a default answer, and I’d be suspicious of anyone who does. It depends on your profit level, how much you need to pull out personally, how many owners there are, what states you touch, what kind of retirement plan you want, and whether you’re planning to sell.

The analyses that come up most often:

S corporation election. An S election can cut self-employment tax, but the math only works above a certain profit level, and only if you’re paying yourself a salary you can defend. Below that line, the payroll costs and extra filings eat the savings. I’ve told people not to do this more often than I’ve told them to.

QBI deduction planning. Whether you get the qualified business income deduction, and how much, turns on your income level, what kind of business you’re in, the W-2 wages you pay, and your property basis. Several of those you can adjust.

Retirement plan design. A solo 401(k), a SEP, and a cash balance plan shelter wildly different amounts of money. If you’re a high-earning owner in your fifties with no employees, a cash balance plan can shelter multiples of what any 401(k) allows. Most owners have never had anyone raise it with them.

Accountable plans. A documented reimbursement arrangement turns spending you were doing anyway into a deduction. It takes an afternoon to set up and people go years without one.

Depreciation and cost segregation, especially if you own the building or hold rental property.

When should we be having this conversation?

Q3 and Q4, while the year is still open and the numbers are close enough to real to model. A conversation in March is a post-mortem. I’ll still have it with you, but we’ll mostly be talking about next year.

Tax planning for employees with equity compensation

High earners at tech and public companies are, in my experience, the most under-served group in tax. The withholding on your equity is often wrong, the defaults your employer picked were picked for administrative convenience, and nobody’s looking at the multi-year picture.

How are RSUs taxed?

RSUs are taxed as ordinary compensation when they vest, at the share price on the vest date. That price becomes your cost basis, and anything the stock does afterward is a capital gain or loss.

Two things go wrong over and over.

The first is under-withholding. A lot of employers withhold on vesting at a flat supplemental rate that sits below the marginal rate of someone earning real money. You don’t notice, because it looks like withholding happened. Then April arrives with a five-figure balance due and underpayment penalties on top.

The second is getting taxed twice on the same shares. Brokerage 1099-Bs frequently report a cost basis of zero on shares sold at vest, even though you already paid ordinary income tax on that value. If nobody adjusts it, you pay again. I find this on new-client returns regularly, and it’s usually worth amending.

What we can actually do about it: fix the withholding, set up estimated payments that match reality, think about whether sell-to-cover is right for you, deal with concentration risk before it deals with you, and line up vest dates with loss harvesting or charitable giving.

How are stock options taxed?

Depends which kind you have.

Non-qualified options (NQSOs) create ordinary income when you exercise, equal to the spread between your strike and the fair market value. Growth after that is capital gain.

Incentive stock options (ISOs) are the interesting ones. Exercising doesn’t trigger regular income tax, but the spread counts as a preference item for alternative minimum tax. Hold the shares long enough to satisfy both holding periods and the whole gain gets long-term capital gains treatment. Sell too soon and you’ve blown it into ordinary income.

ISO planning is where the real money tends to be. The exercise is figuring out how many options you can exercise this year before AMT kicks in, then doing that much, every year, instead of exercising everything at once when you finally leave. Spread over three or four years, that can move a large chunk of ordinary income into capital gains territory. It requires modeling and it requires starting early, which is exactly why it usually doesn’t happen.

What about founder stock?

If you hold stock in a C corporation that qualifies as Qualified Small Business Stock under Section 1202, a large share of your gain on sale may come out federally tax-free. Recent legislation raised the per-issuer cap and added tiered exclusions based on how long you’ve held.

QSBS is picky. The company has to meet gross asset and active business tests, the shares have to be original issue, and the documentation needs to exist before anyone goes looking for it. There are also trust structures that can multiply the exclusion across more than one taxpayer, but those have to be in place well before a sale.

The pattern I see: someone calls me two weeks after signing a term sheet. At that point most of the good options are gone. If you think you might sell in the next few years, that’s the call to make now.

Tax planning for capital gains

How can I reduce capital gains tax?

The levers that actually get used:

Timing. You usually control when you sell. Splitting a sale across two years, or pushing it past a year boundary, can keep you under a threshold that matters for your bracket, the net investment income tax, or your Medicare premiums two years later. That last one surprises people.

Loss harvesting. Realized losses offset realized gains dollar for dollar. This works far better as a habit than as a December scramble, because in December you can only harvest what’s still down.

Gain harvesting. In a low-income year, you may be able to realize gains at a 0% federal rate and reset your basis higher for free. Sabbaticals, startup years, and the gap between retiring and claiming Social Security are all windows for this.

Giving appreciated assets away instead of cash. More on that below.

Installment sales, where the buyer and the asset make that workable.

Holding until death for assets that get a basis step-up, which is less a strategy than a reason not to sell.

Opportunity Zone funds come up a lot and I’ll model them if you ask. But I want to be blunt about something: a bad investment with good tax treatment is still a bad investment. The tax tail should not wag the dog, and I’ve watched it happen.

Tax planning for charitable giving

What is a donor-advised fund and should I use one?

A donor-advised fund is a charitable account you fund now and grant out over time. You take the deduction in the year you contribute, then decide later which charities get what and when.

It solves two separate problems.

The standard deduction problem. Plenty of people give to their church or their kid’s school every year and get exactly zero tax benefit, because their itemized deductions never clear the standard deduction. Bunching fixes this: put three or four years of giving into one year, itemize that year, then grant to your charities on your normal schedule out of the fund. The charities see no difference. Your tax bill does.

The appreciated stock problem. If you donate long-term appreciated stock to a DAF instead of selling it and writing a check, you deduct the full market value and never pay the capital gain. For someone sitting on a concentrated RSU position or founder shares, this is close to the best deal in the code.

Stack them and it gets better. Fund several years of giving with appreciated stock in the year you have a big vest, a bonus, or a sale. High deduction in your highest year, no capital gain, and your giving continues uninterrupted.

Other things worth looking at depending on your age and situation: qualified charitable distributions straight out of an IRA once you’re eligible, charitable remainder trusts if you have a big appreciated position and want income from it, and a private foundation if control and family legacy matter more to you than simplicity. Most people don’t need a foundation. Some people really do.

Tax planning for families with children

Kids bring credits, but the credits aren’t the interesting part.

529 plans grow tax-free for qualified education costs, and Illinois gives you a state deduction for contributing. Recent law also widened what counts as a qualified expense and created a path to roll leftover funds into a Roth IRA under certain conditions.

Employing your kids in your business is legitimate and underused. If the work is real, the pay is reasonable for the work, and you actually document it, the wages are deductible to the business and often taxed at close to nothing to the child. Then the child has earned income, which means the child can fund a Roth IRA. A teenager with a Roth has a very long runway.

Dependent care FSAs and HSAs get skipped by high earners who assume they either don’t qualify or that the amounts are too small to bother with. The HSA in particular is the most tax-advantaged account in the code and most people use it as a checking account.

On gifting: annual exclusion gifts and custodial accounts are fine, but watch the kiddie tax. Unearned income above a threshold gets taxed at your rate, not theirs, which defeats the point if you’re not paying attention.

What does a planning engagement actually look like?

It’s a process, not a PDF.

We start by building a real projection of this year and the next several, from your actual facts rather than last year’s return with a bump on it. Then I run your situation against the strategies that could apply, and put a dollar figure on each one along with what it costs to implement. Anything that doesn’t clear its own cost gets thrown out, and I’d rather show you a short list that’s worth doing than a long one that looks impressive.

After that it’s sequencing, because some of this only works in a particular order or before a particular event. You get a calendar. Then we actually talk during the year, not just at filing, because facts change and a plan built in March often needs revisiting in September.

Frequently asked questions

Is tax planning worth the fee? It should be a number you can see. If I can’t find savings that clear my fee, I’ll say so, and you shouldn’t hire me for planning. Some situations genuinely don’t have enough moving parts.

Can’t my tax software handle this? Software optimizes the return in front of it. It can’t tell you to make an S election, exercise ISOs across three years, or fund a donor-advised fund with appreciated stock before your company sells. Those choices happen long before any number enters a return.

When should I start? Before the transaction. The value of planning falls off through the year and hits roughly zero on December 31. If you’re expecting a sale, an IPO, a big vest, or any significant change in income, call months ahead rather than weeks.

Do you prepare the return too? Yes, and I think it should work that way. A plan is only real if it lands correctly on the return, and handing it off to someone who wasn’t in the conversation is how good planning turns into a notice from the IRS.

Do you work with clients outside Chicago? Yes. I’m in Chicago and work with clients around the country.

Work with Pasquesi Partners

Pasquesi Partners LLC is a Chicago CPA firm working with entrepreneurs, business owners, and high-income individuals. I spent 16 years at Deloitte and Grant Thornton before starting the firm, and I built it around planning rather than compliance because compliance alone was never the part that helped people.

If you own a business, hold equity compensation, have a liquidity event coming, or just have a nagging sense that you’re overpaying, let’s talk.

This article is general information, not tax advice. Rules change and outcomes depend on your specific facts. Talk to a qualified professional about your situation.