Girl scout cookie sales pitches and taxable income confusion
“I have to sell 300 boxes.”
Sophia gave me a serious look as I glanced over her shoulder to waive at her Mom in the waiting SUV.
I got my checkbook and scanned the list of Girl Scout Cookies. Sophia was nice enough to point out her favorites, which I bought.
She handed me a second form.
“Can you also order some cookies from my sister? She’s sick and couldn’t go around the neighborhood.”
Sold.
2 checks, two separate orders.
A cold stare and a hard close was an effective sales pitch, as it turned out. Hopefully, my $18 dollars will generate some income for the Girl Scouts.
As we approach tax season- the most wonderful time of the year- it’s a good idea to talk about confusing tax topics.
One of them is the phrase “taxable income”.
More than one type of taxable income
When most people think of “income”, they’re probably focusing on earned income from a job or an investment. For example:
Employees earn wages reported on W2s
Freelancers earn income reported on 1099s
Interest income, dividend income, and capital gains (or losses) are reported on various tax forms
There are other types of income that are also taxable. Most taxpayers rarely have to deal with these other sources of income, but they may impact you occasionally.
Understanding the gift tax
The tax code allows taxpayers to gift (give away) a limited amount money each year, and there is no tax on the gift. If you stay within the limit, you don’t have to file a gift tax return, or pay taxes on the gift.
So how much can you give away?
In 2024, the gift tax exclusion is $18,000, meaning that you can gift up to $18,000 per recipient and not file a gift tax return. If you’re married, each spouse can give away $18,000 per recipient without incurring the gift tax.
What’s the tax strategy behind gifting dollars each year?
It reduces the size of your estate, which lowers the amount of estate tax (discussed below) that a taxpayer may have to pay when he or she passes away.
Working with the estate tax
A definition from NerdWallet:
“The federal estate tax is a tax that's levied on a dead person's inherited assets. The estate tax ranges from rates of 18% to 40% and generally only applies to assets over $13.61 million in 2024.”
As you can see, the estate tax does not apply to most people. However, if you’re accumulating wealth, gifting money each year can help to lower the size of your estate.
Avoiding taxable income confusion
Too many people don’t find out the tax impact of a particular transaction until the tax preparer hands them the tax return before April 15th.
Let’s work to avoid the surprise.
Check your email inbox, because by early February you should have received a number of tax documents. W2s from work or 1099s from freelance work and investment income.
Download those documents and check the amounts. Are the amounts what you expected?
Say, for example, that your federal income tax withholding on your W2 is less than expected. Less in withholdings may mean writing a bigger check to pay your entire tax liability when you file your return.
Talk to your tax preparer now- not in April. Have the accountant run the numbers to determine the tax impact.
Food for thought.