The runaway winner of most-clicked-on story of 2011 is this one about “extreme couponers.” It was one of my personal favorites at the time, and remains one of my faves. I still look at it sometimes and wonder if there’s something the IRS could use against an extreme couponer who holds goods for more than a year, to limit the deduction to something less than fair-market value. I went through the code, the regs and IRS publications while researching the story, and I think my conclusions are accurate.
The original article is reprinted in its entirety below.
Tax Implications of Extreme Couponers (originally published 5/31/11)
My wife and I were watching a marathon of the TV show “Extreme Couponing” last weekend. Aside from wondering what someone could possibly do with 114 boxes of Excedrin PM and more than 90 bags of croutons, my mind of course was thinking about taxes. What are the tax implications to people who take “couponing” to the extreme?
Contributions to Charity
If you’ve ever watched the show, you know that the people it features tend to buy massive quantities (in some cases, hundreds of units) of canned or boxed goods and use combinations of in-store discounts and coupons to reduce their final bill to just a fraction of what it would have been without the coupons. For example, it’s common for a person with a “pre-coupon” bill of $1,000 to end up paying less than $100 after the coupons are used. In many cases, the person donates much of their purchase to charity. How much can they deduct as a charitable contribution? As with most items of tax law, the answer is, “It depends.”
In this case, the “It depends” part centers on how long the taxpayer has held the goods before donating them. If the goods are held for less than a year, the charitable deduction is limited to the taxpayer’s basis in the goods. If the goods are held for more than a year, the charitable deduction is the current fair-market value of the goods. In the case of “Extreme Couponers,” the difference can be huge.
Patty goes shopping and has a “pre-coupon” grocery bill of $1,000. After using massive amounts of coupons, her final bill amounts to just $50. Before the end of the year, Patty donates 50% of the goods purchased to a local food pantry. Her charitable deduction would be limited to her basis in the donated goods, which would be $25 ($50 final bill x 50% donated).
Assume in Example 1 that Patty bought non-perishable goods with a long shelf life. She holds on to 50% of her purchase for one year and one day, and then donates the goods to the food pantry. Because she has held the goods for more than one year, they are now considered long-term capital assets and she can deduct the current fair-market value of the goods – so potentially $500 or more.
These examples are extreme over-simplifications, of course, but they illustrate the basic point – I would guess that in most cases the goods get donated less than one year after they are purchased, which means the Extreme Couponers are probably not saving much on their taxes with their donation.
Bonus Tax Analyis from Jason — Are Rebates Considered Taxable Income?
The short answer to this is, no. Rebates in any form reduce your basis in the items being purchased, but are not considered to be taxable income. This is true of mail-in rebates, credit card reward programs, etc.
(EDITOR’S NOTE: Please note that the rules for determining the charitable deduction for food donations are much different if the food is donated by a business that holds food in inventory, such as a restaurant. That discussion is beyond the scope of this article.)