Difference Between Tax Planning and Tax Management

November 17, 2022

Difference between Tax Planning and Tax Management

Tax planning and Tax management might sound similar, but there are differences between the two. Tax planning ensures that one takes advantage of every legal deduction and credit mechanisms to lower the tax bill. Tax management is about reducing the taxes you owe each year. It’s more of a proactive kind of action compared to tax planning. You have to keep the taxable income as low as possible, and so you owe less. Both are important as far are managing financial affairs are concerned. If you need to have a thorough understanding of taxes, it’s important to know the difference between tax planning and tax management.

Tax Planning

The aim of Tax planning is to figure out an individual’s financial status and perform actions that maximize deductions, exemptions, allowances, and rebates in a legal manner. This will make sure that the individual’s tax liability is low.

Tax Management

Tax management involves the process of complying with established income tax laws and regulations. This includes penalties, appeals, tax revisions, prosecutions and settlements of tax cases. The main purpose of tax management is to ensure compliance with tax laws and thereby minimizing tax costs.

Differences

The basic difference between tax planning and tax management is that tax planning focuses on reducing the tax liability and tax management is all about minimizing the taxes.

Let’s look at the main differences between the two.

a) Tax planning is about minimizing your tax burden. By taking advantage of tax breaks and deductions, you can reduce your overall tax liability. In tax management, the main focus is to ensure compliance with legal formalities in order to reduce taxes.
b) Tax planning can help you make better decisions and tax management helps in fulfilling the conditions for effective decision making.
c) In tax planning, before choosing the best alternative, all alternatives are compared. Tax management involves the process of maintaining accounts in prescribed forms, filing returns, and paying taxes.
d) In tax planning, future benefits are taken into account. In tax management, the past, present, and future are considered.
e) Through tax planning, diverse tax benefits can be claimed. In tax management, strict adherence to the conditions for effective decision-making is important.
f) Tax planning is not a compulsory activity. But tax management is compulsory for the assesse.
g) Tax planning helps in reducing tax liability in short-term and in long term. Tax management helps in avoiding payment of interest, penalty, and prosecution.

In conclusion, tax planning is a transparent and legal method of taking the full advantage of taxation laws. It effectively helps manage the income and taxes so that the tax liability on the assesse is very less. Tax Management is about managing the finance while complying with all the tax provisions, so as to avoid the payment of penalties, interests and, prosecution.

The terms tax planning and tax management have been used in financial management quite frequently without deep understanding. The aim of both tax planning and tax management is to reduce and minimize taxes.