It’s a holiday week, so I’m re-posting popular stories from the past.
A few years ago a show called “Extreme Couponing” was on TV. I decided to explore the tax consequences of people who use dozens (or sometimes hundreds) of coupons to end up paying almost nothing at the grocery store.
A common search term that leads people to this website is “do extreme couponers pay tax?”. The short answer to that question is: no.
There are no income tax implications to using coupons, whether you use one or two coupons or you go extreme and use hundreds of coupons at one time. Coupons reduce your basis in the things you purchase.You are not taxed on your savings.
For those of you who want official language, here is IRS Revenue Ruling 84-41, citing an earlier Revenue Ruling (76-96) (emphasis added):
Rev. Rul. 76-96 holds that the receipt of the rebate by a qualifying retail customer does not result in the receipt of gross income. However, Rev. Rul. 76-96 holds that the rebate represents a reduction in the purchase price of the automobile, requiring a downward adjustment to the basis of the automobiles in the hands of the purchasers under section 1012 of the Code.
Both revenue rulings relate to manufacturer’s rebates in business transactions, but the rationale applies to other situations, including purchasing goods with coupons.
You are an “extreme couponer.” You buy goods with a fair-market value of $1,000. After using coupons and rebates, you end up actually paying $50 for the goods. Your basis in the goods is $50. You do not have taxable income.
If you donate the goods to charity, there are implications regarding how much you get to deduct as a charitable contribution. I explore that topic in this post. And if you happen to re-sell any of the goods at a higher price, you might have a taxable capital gain. But simply saving big bucks on a purchase does not result in taxable income.
Related story on airline miles: from LA Times, IRS Clarifies its Stand on Whether Airline Miles are Taxable. (Airline miles aren’t taxable.)