Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

Guide for a Law Enforcement Tax Return

We have all had the thought at least once in our lives… ‘what on earth is going on here’? Going over your tax return can easily be one of those moments. Having a professional to ask questions and help you walk through and explain it is an excellent source of information. Here I will go through some highlights of a general tax return, and something very specific to those in the law enforcement occupation.

The most important thing is that a tax return (the 1040) reads top to bottom. I will lay out a way of how it flows, but when looking at the actual tax form, we go top to bottom.

My brain always tries to break things down into the more simple way of looking at it, before I can add any complexities. So a tax return starts with how much income you made, then you calculate how much tax that income should pay. You then compare it to how much you have already paid during the year (such as withholding from your paycheck). So, income creates tax, tax minus anything paid already = bottom line. Either you have additional tax due (because not enough was paid already) or are due a refund (because you paid more already than the tax that was due). If it was really this simple – one, I wouldn’t have a job, but two, and most importantly – we would all pay a lot more taxes than we currently do. This is just a baseline to get it started.

Enter the big word ‘deductions’. Deductions reduce your income – which is awesome because your tax is calculated based on your income. The most common source of deductions comes from either the standard deduction or itemized deductions, and we add a new part to our simple look of a tax return. Income – deductions = taxable income. Tax is calculated from the taxable income, not the first part of income. So, income – deductions = taxable income -> tax – withholding = bottom line of your tax return.

There are deductions that work differently than the itemized deductions, and they go in a different spot. These deductions are things like student loan debt, IRA contributions, etc. Most are subject to an income limitation (if you make too much money, you can’t take the deduction). These deductions go against your income before deductions and create what is called your adjusted gross income, or AGI – which is another magic tax word. A lot of limitations are based on AGI. Now we progress to Income – limited deductions = AGI – deductions = taxable income -> tax – withholding = bottom line. Because the limited deductions are not consistent for everyone, it is generally ok for estimate purposes to think of your total income as your AGI. It isn’t perfect, but it gets you close enough for ballpark purposes – but it cuts out some of our growing formula for taxes. AGI – deductions = taxable income -> tax – withholding = Bottom line.

Credits are different from deductions; they go between the tax and the withholding line and effect the bottom line number much more dramatically. Credits are also fairly few in number; the most common is the child tax credit for kids under 17 on December 31st of the year. A $2,000.00 deduction only changes the bottom line by the rate at which the tax would be imposed on it. 10% tax on $2,000.0 is $200.00 bucks, thus that deduction only saved $200.00 of tax. Still good to have, and it is more valuable the higher tax bracket you are in. However, a $2,000.00 credit, goes against the tax number directly, which affects the bottom line on a 1 to 1 basis, just like the withholding from your paycheck. AGI – deductions = taxable income -> tax – credits – withholding = bottom line.

We are almost to the important stuff I promise!

Now we add a sad line to our flow of the tax return. Additional tax. There are a few things that add more tax than the normal tax calculated from your taxable income. Withdrawing money early from a retirement account carries a 10% penalty on the amount withdrawn. Doing self-employed work (1099 extra jobs) carries something called self-employment tax which is roughly 15%. The nasty – and important part to understand about this additional tax is WHERE it goes in the total calculation for the bottom line. It is after tax and before withholding. AGI – deductions = taxable income -> tax – credits + additional tax – withholding = bottom line. [For those super savvy, yes, there are some credits that come in between additional tax and withholding, but that is an extra layer of complication that isn’t totally necessary for our purposes here] The challenge with the additional tax being here, is that deductions do not affect the additional tax number. Say for example as is happening all over the world – natural disaster takes your home. Under certain circumstances, you can take a pretty big deduction for that and it is possible that your taxable income is $0.00. Guess what the tax is on $0.00? $0.00. You would expect 100% of what was withheld from your check (federal withholding) to be refunded to you… Unless you have one of these additional tax numbers, again like extra jobs. If you had $10,000.00 of extra jobs, you would have $0.00 of tax calculated from your taxable income, and then you would ADD the ~15% from your $10,000.00 of extra jobs and still have a tax liability of about $1,500.00, which you then compare to how much was withheld from your check.

Finally, the good stuff. (Especially if you work in Law Enforcement or are self-employed in some way)

Self-employed work can be reported on form Schedule C. The Schedule C allows you to report your gross self-employed earnings, subtract your deductions directly related to those earnings in particular and come up with a ‘profit’ number. That profit number get slid in as part of your income, or AGI. This means that your gross earnings are not taxed, only the net. It also means that you can take these deductions in addition to your itemized or standard deduction. Further, the self-employment tax (the additional tax) is calculated from the net earnings. By correctly reporting these deductions for your self-employment income (extra jobs) you save both the regular taxes AND the additional taxes. This does still not create a 1:1 ratio for your deductions, making your self-employed expenses ‘free’… but it does illustrate how very impactful those deductions are!

Please take care to keep track of the things you spend; they can make a big difference to your tax return. Additionally, be careful to prepare for the tax impact your self-employed work will bring. If you anticipate a stark change in self-employment income, please consider a tax consult with a professional. Many have said, ‘knowing is half the battle’. Know how impactful your deductions on extra jobs can be, but also keep in mind why – because of the additional tax they are helping to help offset, but that will still be present on the rest of your net.

Income (Earnings and net self employment earnings) – limited deductions = AGI – itemized / standard deduction = taxable income -> tax – credits + additional tax – withholding = bottom line.

Charles Steinmetz

Senior Tax Advisor

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Self-Employment Taxes: A Deeper Dive

Self-Employment Taxes: A Deeper Dive Self-employment taxes are a critical component of the tax system in the United States, impacting individuals who work for themselves. Understanding the nuances of these taxes can help self-employed individuals plan and manage their...

Education Tax Benefits: Maximizing Savings with Credits and Deductions

Education Tax Benefits: Maximizing Savings with Credits and Deductions Navigating the complexities of tax season can be daunting, but for those bearing the costs of higher education, there are valuable tax benefits that can ease the financial burden. Among these are...

How to request Individual Penalty Abatement

How to Request Penalty Abatement Penalty abatement is a great way to help reduce your client's tax debt. Here's how you can request apenalty abatement from the IRS. Let’s say you’ve determined that your client is eligible for a penalty abatement to help reduce their...

Understanding the Child Tax Credit for 2023

Understanding the Child Tax Credit for 2023 The Child Tax Credit (CTC) is a significant provision in the U.S. tax code designed to offer financial relief to families with qualifying children. As we navigate the 2023 tax year, it’s crucial to understand the current...

Tax-Smart Strategies to Pay for College

Tax-Smart Strategies to Pay for College   As the cost of college continues to rise and inflation soars, families are looking for ways to make ends meet. One way to do this is by taking advantage of tax breaks that can help offset the cost of tuition and other...

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections As a small business owner, you understand that time, money, and peace of mind are precious commodities. The world of taxes can often feel like a labyrinth of complexities, with ever-changing rules...

The Augusta Rule: A Comprehensive Guide to the Section 280A Deduction for Small Business Owners

As a small business owner, you’re likely familiar with the home office deduction. This popular tax break allows you to write off up to 300 square feet of workspace in your home at a rate of five dollars per square foot, resulting in a potential $1,500 annual...

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings Embark on a financial adventure with us as we introduce you to the not-so-secret world of the Mega Backdoor Roth – the financial strategy that's not only powerful but sounds almost as charming as a...

Get Organized and Sail Smoothly with a Family Tax Firm

How to Get Organized and Sail Smoothly with a Family Tax Firm? Tax season—an annual event that can trigger a range of emotions, from anticipation to anxiety. For small business owners, the prospect of tackling complex forms, deciphering intricate regulations, and...

Tax Troubles in Houston?

Tax Troubles in Houston, Texas?Houston, Texas—a city of boundless opportunity, where dreams are forged and businesses thrive. Yet, beneath the gleaming skyscrapers and bustling streets, lies a challenge that many small business owners face: navigating the complex maze...

Request an Appointment Today

11 + 1 =

Call us at

Pin It on Pinterest

Share This