Why police officers should take advantage of tax breaks (and how to do it)
From allowable deductions to deferred compensation, learn how to fully leverage these financial opportunities
Should a police officer seek the help of a professional tax preparer? Answer: Yes.
It is very wise for a career police officer and/or a public safety official to develop a long-term business relationship with a professional tax preparer who is experienced in filing tax returns on behalf of law enforcement personnel, especially if that tax preparer is familiar with all of the job related deductions that the individual is legally entitled.
The magic of IRS Schedule A
I am not a professional tax preparer. However, I did interview three retired San Francisco police officers who are professional tax preparers, and each officer has been a professional tax preparer for several years. Sgt. James Barron, Officer Duane Collins and Inspector Ned Totah have been professional tax preparers for several years and they are very familiar with the tax deductions that the IRS allows police officers and public safety officials.
Sgt. James Barron told me that Schedule A (Form 1040) is the form to use to figure your itemized deductions. A native New Yorker, Sgt. James Barron at the age of 14 was taught by his father how to prepare his own taxes when he got his first job and entered the workforce. In 1973, James Barron attended the University of California at Berkeley and studied business administration. Sgt. Barron was a former employee of the San Francisco Federal Reserve Bank and he worked in the business world for several years before joining the SFPD in 1983.
Sgt. James Barron continued to prepare his own taxes throughout his 21-year career as a street cop and he also assisted his fellow police officers with the preparation and filing of their taxes. After 21-years with the SFPD, Sgt. Barron earned a disability retirement. But he remained active upon retirement by becoming a six year seasonal employee of H&R Block, Inc. Sgt. Barron is also a California-Registered Tax Preparer CTEC #A111077.
Schedule A (Form 1040) offers a lot of tax incentives for police officers if they own a home and are thorough in documenting their miscellaneous deductions. In 2010, a married couple is allowed $11,400 as a standard deduction. A single person is allowed $5,700 as a standard deduction. A police officer can use Schedule A for work related deductions such as uniforms and equipment. Sgt. Barron noted that the uniform and equipment deductions are permitted if the dollar value is above the amount of the given allowance and/or expenditure of the items. If an officer can produce his dry cleaning receipts, the cost of cleaning his police uniform is also a tax-deductible expense.
Other allowable deductions are union dues, a safe deposit box, attending a three day work related educational seminar where your entire airfare and hotel accommodations are deductible and 50 percent of your meals are deductible.
A police officer is also permitted to deduct the cost of one off-duty hand gun per year. The equipment for that off duty personal gun such as the holster, ankle or shoulder, and the bullets for the gun are also tax deductible.
A police officer's transportation costs to their normal work station from home is not tax deductible. However, if a police officer is not going to their normal work station (e.g to testify in court or attend a parole hearing) and they are driving from home, then the cost of transportation is a normal business expense, usually computed according to mileage. The key to effectively using Schedule A is in keeping good records and receipts.
457(b) deferred compensation
A 457(b) deferred compensation plan is a defined contribution retirement plan for employees of local, state and federal governments and agencies, and certain non-profit organizations, like public schools and county hospitals. The 457 deferred compensation plans are named after the IRS Code Section 457. In 2010, annual contributions to the 457(b) deferred compensation plan is limited to 100 percent of compensation to a maximum of $16,500, and indexed for inflation in $500 increments, up to age 50. Participants age 50 and over may defer up to $22,000.
In February, I interviewed Duane Collins who was a SFPD Officer for just over 28 years. Officer Collins is the owner of Collins Tax Consulting which specializes in tax preparation for law enforcement personnel. Officer Collins is a firm believer in a police officer contributing to their 457(b) deferred compensation plan. In 1971, Duane Collins became a new officer with the SFPD. He was an active member of the San Francisco Police Officers Association and served as its Treasurer. Officer Collins also served as the Corporate Secretary of the San Francisco Police Credit Union. In October, 1982 he went to Honolulu, Hawaii with his bride for their honeymoon. However, he spent several honeymoon hours studying the H&R Block tax preparation course.
In 1983, Duane and his wife of 29 years started Collins Tax Consulting.
During his tenure in the SFPD, Officer Collins also taught courses in financial planning at the San Francisco Police Academy to cadets and the staff. He always emphasized the importance of maximizing one’s contributions to the deferred compensation plan. In addition to building retirement monies tax-deferred over the course of a patrol officer’s career, the added benefit of reducing a police officer’s taxable income is another reason to participate in the deferred compensation plan.
Officer Duane Collins said that he would suggest that anytime a police officer worked overtime and made approximately 15K-20K in that year, it would be wise for them to put that money in their deferred compensation account. He said that a police officer should get use to living within his salary income and not on his overtime income. Officer Collins advises that a police officer take as much overtime as “compensatory time” as he can get during his last two years on the job before retirement. And, as you approach retirement from the police department pay off all of your credit card debt, automobiles, ski boats, and motor homes. Officer Collins also suggests if possible, try to double up on contributions to your deferred compensation account the last three years before you retire. Officer Duane Collins retired from the San Francisco Police Department on January 8, 2000.
Developing good tax habits
Inspector Ned Totah who was a SFPD Officer for 28 years — he was 22 years old when he joined SFPD on February 18, 1980. His goal was to be a good officer and to retire at age 50. Inspector Ned Totah achieved both of his goals and in February, 2008 he retired from the department.
Inspector Totah has always loved numbers and high-technology toys. His father taught him at an early age the value of money and saving. During his police career he would prepare his own taxes and those of his fellow officers. In 1985, at the suggestion of a fellow officer, he established Totah’s Tax Service. In 2010, Inspector Ned Totah became an Enrolled Agent. In addition to tax preparation he can now represent clients before the IRS at administrative hearings.
Inspector Totah is a big advocate of police officers developing good tax habits such as record keeping of all receipts, mileage books for transportation and maximizing contributions to the 457(b) deferred compensation plan. He suggests that police officers live within their salary and put at least one half of their raises into their deferred compensation account. The purchase of a home is a great way to build equity over the long term. Totah says one should eliminate credit card debt.
Police officers can take advantage of the many tax deductions that the IRS offers through wise financial planning and the use of professional tax preparers. In my discussions with these three retired SFPD officers whose experiences contributed to the writing of this article, I was pleased to learn that they continue to serve and protect — only they serve and protect the assets of their fellow police officers.
- Financial Planning
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