just for fun

13 Uses For Leftover Halloween Candy – And The Tax Consequences

Halloween candy and skull

Here’s my Halloween confession: we didn’t give out candy this year. We were out with two of the kiddos, and the third was at a party. It was very last minute, which means that since we bought candy, we still have candy. And let’s not forget the booty from trick or treat. It’s a challenge to figure out what to do with all of the sweets. This dilemma inspired a post a few years back. It’s back again, with updates, including those under the Tax Cuts and Jobs Act (TCJA). Here are 13 uses for leftover Halloween candy—complete with the tax consequences, of course:

1. Give the really good stuff to your favorite tax pro just because.

Non-tax consequences: Everybody loves a gift, including tax geeks. Just be sure to pony up Reese’s peanut butter cups and Milky Way bars—don’t try to sneak in your butterscotch stragglers.

Tax consequences: None. If you’re handing over the candy out of the kindness of your heart (or with “detached and disinterested generosity”) and not expecting anything in return, it’s a gift: gifts are not taxable for income tax purposes. And unless you make a habit of giving your tax pro gifts worth more than the annual gift tax exclusion ($15,000 for 2019) – which I am in no way discouraging – you’re fine when it comes to gift tax, too.

2. Pay your tax professional in chocolate.

Non-tax consequences: Depending on costs, this could be a lot of candy. If your tax pro has a sweet tooth, he or she might appreciate some treats, otherwise, they’ll probably insist on payment in the way of cash, check, credit card or bitcoin.

Tax consequences: It used to be the case that fees for tax advice or tax preparation – even if made in candy—could be deductible as a miscellaneous deduction subject to the 2% floor. That’s no longer the rule under tax reform. The deductions for tax-preparation expenses and other miscellaneous deductions that exceed 2% of your adjusted gross income (AGI) have been eliminated through 2025.

3. Pay your plumber or electrician in Snickers bars.

Non-tax consequences: See #2 above.

Tax consequences: None. The costs of most personal services are not deductible for individual taxpayers.

4. Take a bowl (or two) of candy to hand out to your colleagues.

Non-tax consequences: Your colleagues will thank you for making them happy. Also fat. But mostly happy.

Tax consequences: Giving candy to your colleagues isn’t deductible. Even if they could be couched as ordinary and necessary in your line of work (and who doesn’t think that M&Ms are both ordinary and necessary?) unreimbursed employee expenses are no longer deductible. As noted above, deductions for miscellaneous expenses that exceed 2% of your AGI have been eliminated through 2025.

(You can find more on the elimination of the deduction, including what it means for home offices, here.)

5. Keep a filled candy bowl at the office for your employees.

Non-tax consequences: Your employees will think you’re awesome, assuming that you give them the good stuff. Leave out a bowl of unrecognizable nougats, and you’ll have a whole group of folks posting nasty comments to Glassdoor.com before you can say butter brickle.

Tax consequences: None. There’s no out-of-pocket cost to the employer for candy that was gathered by trick or treaters, though candy purchased at a store to feed employees would be a business expense. Occasional snacks offered to employees at their workplace are de minimis and are not includable for tax purposes: the Internal Revenue Service (IRS) considers these items “so small as to make accounting for it unreasonable or impractical.” In fact, the Latin phrase de minimis translates roughly to “of little importance” – which means that the IRS clearly doesn’t know how I feel about Junior Mints. But if you were touting hand-rolled truffles a la Google, it could be considered a taxable benefit. Stick to what’s in the trick or treat bags.

(For more on IRS guidance regarding meals and entertainment, click here.)

6. Exchange your Whoppers for other stuff.

Non-tax consequences: If you use a program like Halloween Candy Buy Back, participating businesses will “buy” back your candy in exchange for cash, coupons, and other creative exchanges; businesses may then work with groups to send candy to our soldiers, children’s hospitals, homeless shelters or other deserving folks. That should give you a reason to smile.

Tax consequences: Property held for personal use is considered a capital asset, and you have to report any gain from a sale or exchange as a capital gain. Assuming that your candy is exchanged for a similar item, there should be no gain and no tax consequences. But what if you lose out by trading a stash of Reese’s cups for a gift certificate to a restaurant that you’ll never patronize? You can’t deduct losses from the sale of personal property (more on losses here). And don’t get fooled into thinking you can take a charitable donation: you can only claim a charitable deduction for gifts made to a qualifying organization to the extent that you don’t receive something in return (more on quid pro quo here).

7. Donate your candy to charity.

Non-tax consequences: Warm fuzzies. You did a good thing.

Tax consequences: Assuming that you contribute to a qualified charitable organization (check with IRS using the new search tool if you’re not sure), you can deduct the value of the goods as an itemized deduction. Document your gift and get a receipt. There’s one more caveat: In addition to making sure that the organization actually wants your extra candy, if you’re donating property that’s not related to the charity’s exempt purpose, your donation may be limited. In other words, if you’re giving candy to an after-school program, you can be reasonably sure that the program will use the candy to accomplish its charitable purpose. But if you donate that same candy to an art museum, not so much. So, use common sense—and a little courtesy (ask first).

8. Use candy as prizes for bingo and card games.

Non-tax consequences: Kids, including big ones, love bingo. We play at our house because it’s fun, it’s easy, and notwithstanding some tricky advice from the seniors in my hometown, it doesn’t require much skill.

Tax consequences: Our family bingo games don’t have tax consequences because we play for peanuts—well, literally for peanut M&Ms, but you get the point. In general, bingo winnings are taxable to the winner as income on line 21 of your federal form 1040: It does not matter whether the winnings are in cash or property (though clearly if you eat the winnings, they’re pretty hard to trace, not that I’m suggesting you evade taxation by this method). And in case you’re wondering if your unorthodox means of play really qualifies as bingo, there is a tax statute for that: 26 C.F.R. § 1.513-5 in the Treasury Regulations.

9. Use candy for tips.

Non-tax consequences: I’m not suggesting that you not give the paperboy a cash tip. But why not hand over some yummy candy as well? It can’t be a bad thing to be known as the house on the block that gives out the best tips ever. But that means you have to give out the good stuff (giving out Necco wafers isn’t going to win you any kudos).

Tax consequences: It depends on who you’re paying. You can’t deduct tips to the paperboy or the pizza delivery girl. However, to the extent that you’re tipping the babysitter or other employees, tips are taxable to them (and thus possibly deductible to you) – but see #10.

10. Make gifts for the babysitter, maid, etc.

Non-tax consequences: Who doesn’t like getting a nice gift now and again? With a little ingenuity, you can fill a cute gift bag filled with candy. Voilà! Minimal cost and effort to let folks know they’re appreciated.

Tax consequences: No matter what you want to call it (a thank you, a bonus, a perk), a gift made to an employee is considered compensation. There’s an exception for small noncash gifts considered de minimis: Those gifts are not taxable. So, a few Hershey bars in a gift bag would be de minimis and non-taxable—a tower of Godiva truffles, likely taxable, though clearly still delicious.

11. Recycle your stash of candy at Christmas.

Non-tax consequences: If you put leftover candy in the freezer, you can recycle it for later. Money saved. Just be sure to sort out the candy with ghosts and pumpkins; otherwise, you’ll have to explain why Santa and the elves are handing out Halloween candy. (Note to new parents: Trying to make up a story about the rarely seen “Christmas bat” almost never works.)

Tax consequences: None. Even if you had paid for it, you can’t claim tax deductions for personal expenses like food or candy.

12. Conduct science experiments.

Non-tax consequences: Candy is pretty awesome, and science is pretty awesome, so why not combine the two? There are all kinds of experiments on candy to keep your budding scientists interested, from melting Starbucks to floating Skittles (you’ll find details on those and more at Candyexperiments.com).

Tax consequences: There’s no allowable tax deduction for tutorials and extras to keep your kids at the top of the class since they’re considered a personal expense (exceptions exist). If you’re a teacher, however, the results are different. Despite threats that the deduction would be eliminated as part of tax reform, teachers may still deduct up to $250 if they use out-of-pocket cash to buy classroom supplies (depending, candy could qualify as “supplementary materials that you use in the classroom”). It’s an above-the-line deduction, which means you don’t need to itemize.

13. Eat it.

Non-tax consequences: Halloween candy is delicious. You might, however, have to explain to your son why you ate his Butterfinger without asking (pro tip: there is no suitable answer). If you decide to sneak an extra treat, remember that there could also be potential long-term effects like cavities and an extra pound or two.

Tax consequences: No immediate consequences. Dealing with some long-term consequences of eating candy, however, might be deductible. While you can’t deduct the cost of going to the gym or joining a weight loss program to get rid of those extra pounds, dental and medical expenses are still deductible. You can deduct out-of-pocket expenses paid for medical care that exceed 10% of your AGI. That means that you can deduct dental expenses if you end up with a mouth full of Skittle induced cavities – but even I’ll admit that’s one heck of a way to squeeze out a deduction.

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collections

IRS Announces New Private Collection Agency Payment Option

The Internal Revenue Service (IRS) has announced that a new payment option has been added to the private debt collection program. The payment option is intended to make it easier for those who owe to pay their tax debts, although some practitioners, like me, fear that it could lead to abuse.

Taxpayers can now choose a preauthorized direct debit to make payments toward their federal tax debt. With direct debit, the taxpayer will give their written permission to the private collection agency (PCA) to authorize payment on the taxpayer’s behalf to the Department of the Treasury. This means that taxpayers can schedule payments with the PCA.

This option is being touted as a convenience for taxpayers and will supplement existing IRS payment options. Those other options still exist. You can find electronic payment options through IRS at IRS.gov/Paying Your Taxes. You can also pay by check: Checks should be made payable to the U.S. Treasury and sent directly to the IRS, not the PCA.

The option to pay through the PCA is brand-new and reflects a shift in collection efforts. In 2017, Congress forced the IRS to hand over some collections to PCAs. The law was pushed through despite the failures of past privatization efforts and despite concerns about what privatization efforts might mean for taxpayers (including those expressed by the Treasury Inspector General for Tax Administration and former National Taxpayer Advocate Nina Olson).

(You can read more about private debt collections here.)

One of the companies handling private collections is Pioneer Credit Recovery. In 2017, a group of senators sent a letter  to Pioneer, explaining that they were particularly concerned about “Pioneer’s contract because of the abuse of federal student loan borrowers by its parent company, Navient, through its Education Department student loan servicing contracts.”

The senators obtained the call scripts used by Pioneer and other PCAs. The Senators found all of the scripts to be concerning, but those used by Pioneer were “particularly troubling.” For example, part of the collection process should involve telling taxpayers that they have the right to obtain assistance from the Taxpayer Advocate Service (TAS). The Senators found, however, “there is no evidence in the Pioneer call scripts . . . that the collector intends to provide this information to taxpayers.” At least one PCA, Performant, did have scripts that included instructions on how a taxpayer may contact the TAS.

Pioneer’s call scripts also allegedly made an implied threat that the debt collector would have the means to seize payment involuntarily; that may be a violation of the Fair Debt Collection Practices Act (FDCPA) and other laws. Additionally, in keeping with issues raised by the IG, Pioneer’s call scripts ask for payment agreements that are too long. The IG previously reported to Congress that he had concerns that PCAs were extending payment requirements “beyond what the law provides.”

(For more on the IG’s concerns, click here.)

Months ago, Olson highlighted issues with PCAs as one of the 20 most serious problems encountered by taxpayers. According to the IRS, from the start of the program in April 2017 through June 13, 2019, the IRS has given PCAs more than 1.9 million total cases that represent more than $16.2 billion of the IRS’ balance-due inventory. To date, the PCAs have “assisted” (that’s the IRS’ word, not mine) more than 163,000 taxpayers who either paid their balances in full or set up a payment arrangement–just a fraction of the outstanding cases. 

Olson noted that while program revenues surpassed program costs for the last fiscal year, the surplus was achieved to a significant extent by collecting from financially vulnerable taxpayers. For example, 40% of taxpayers who entered into Installment Agreements (IAs) while their debts were assigned to PCAs had incomes at or below their allowable living expenses, and 44% of taxpayers who made payments while their debts were assigned to PCAs had incomes at or below 250% of the federal poverty level. Predictably, that didn’t yield good results: Default levels for taxpayers working with PCAs who entered into IAs were about twice as high as compared to taxpayers who were not working with PCAs. 

Allowing PCAs to take direct debit information over the phone doesn’t alleviate these concerns. In fact, in a high-pressure situation (one that is, by all accounts, not regularly monitored by the IRS), taxpayers may feel that offering payment information immediately is the best way to get the PCAs to stop calling–even if the taxpayers do not have the money. Remember those default rates for installment agreements? Think similarly, but with bounced checks. Based on the program’s history, it’s also a legitimate concern that taxpayers may be pressured into payment arrangements through direct-debit for more extended periods than authorized by law, and taxpayers who may be otherwise deemed uncollectible may be pressured to make payment.

When taxpayers have to make payment directly to the IRS, there’s generally a pause between the time that the collection has been demanded and the time that payment is made. Allowing PCAs to take payment over the phone takes away that pause and may lead to bad results. The data suggests that payment and other agreements made directly with IRS representatives produce better and more efficient results.

Additionally, according to the IRS, when taxpayers choose this new option, they’ll send a written authorization to the PCA (not the IRS) with their bank account information. Once the PCA receives the authorization, it should send a letter confirming the details before drafting a check to the Treasury. The check is then mailed to the IRS. 

The process–using that third-party intermediary–feels like the perfect environment for errors, compromised data or worse. Even the IRS seems to get that this could be problematic: In the press release announcing the new payment option, they reminded taxpayers to “be on alert for scammers and identity thieves pretending to be from a PCA.”

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cryptocurrency

IRS Adds Cryptocurrency Question To Form 1040

Days after the Internal Revenue Service (IRS) released two new pieces of guidance for taxpayers who engage in transactions involving virtual currency, the IRS announced another compliance measure: a checkbox on form 1040. The checkbox, which appears on the early release draft of the form 1040, asks taxpayers about financial interests in virtual currency.

The checkbox appears on the second early release draft of the 2019 Form 1040, Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). The checkbox is at the top of Schedule 1, which is used for reporting income or adjustments to income that can’t be entered directly on the front page of form 1040:

1040 crypto question

The question is:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?  

If you’re wondering why that sounds familiar, the wording closely parallels the verbiage on Schedule B, Part III, concerning offshore accounts. That question appears at the bottom of the Schedule. It asks:

At any time during 2018, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? 

The similarities aren’t surprising. You may recall that I’ve suggested before that the strategy the IRS is using to pursue cryptocurrency is reminiscent of how the agency chased down offshore accounts.

However, I’m not overly keen on the location of the cryptocurrency question. As noted, taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 should check the appropriate box to answer the virtual currency question. But taxpayers who don’t have to file Schedule 1 for any other purpose may not be aware that they need to file Schedule 1 to answer to this question if it applies to them. Yes, tax software interviews will likely catch it – but what if they don’t? Or what if taxpayers are completing the form by hand? Or if tax preparers don’t think to ask? 

I think it’s something that IRS will need to address. The IRS will accept Schedule 1 comments via email at WI.1040.Comments@IRS.gov for a 30-day comment period beginning October 11, 2019. The IRS cannot respond individually to each comment received, but all feedback will be considered.

Why does the location of the checkbox matter? Compliance. The checkbox is ostensibly on the form to remind taxpayers to report their cryptocurrency transactions. But those tax professionals like me who have seen the response to the checkbox on Schedule B know that this is also an easy way to hold those who don’t check the box – even by accident – accountable. The IRS can and has taken the position that willfully failing to check the box related to offshores interests can form the basis for criminal prosecution. Failing to check the box by accident can still result in headaches and penalties. I fully expect a similar result on the cryptocurrency side.

If you’re looking for more information on cryptocurrency, you can read more about the recent guidance here. You can find out more about the taxation of cryptocurrencies like Bitcoin here. And you can get up to date about how the IRS is targeting non-compliance through a variety of efforts, ranging from taxpayer education to audits to criminal investigations here.

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individual

Are You Ready to File Your Taxes On Extension?

Are you scared to look your tax professional in the eye? The deadline for taxpayers who requested an automatic six-month filing extension is fast approaching–and if Twitter is to be believed, many taxpayers still have to get their information to their tax preparers. Remember that most taxpayers on an extension must file their tax returns on or before the October 15, 2019, deadline.

About 10% of individual taxpayers, or 15 million people–including me–filed for an extension this year. Although October 15 typically marks the due date for those on extension, some taxpayers have more time to file. Members of the military serving in a combat zone normally have until 180 days after they leave the combat zone to file their return and pay any taxes due. Additionally, taxpayers who live in or are affected by a federally declared disaster area may be allowed more time to file: That includes taxpayers affected by Hurricane Dorian and Tropical Storm Imelda.

The Internal Revenue Service (IRS) recommends that taxpayers file their tax returns electronically. The IRS says that e-File is “a faster and safer way of filing your taxes.” Of the 141,567,000 returns received by the IRS in the spring filing season, more than 90% were filed electronically.

You can e-file with a paid preparer or tax software, including FreeFile. FreeFile is available through the IRS website through October 15, 2019, at midnight ET. With FreeFile, commercial partners provide free tax software for about 100 million taxpayers with incomes of $66,000 or less to prepare and file returns electronically. 

If you are expecting a tax refund, consider direct deposit. With direct deposit, the IRS can deposit your tax refund directly into as many as three accounts.

If, instead, you expect to owe, don’t let that deter you from filing on time: You should file a timely return even if you can’t pay your tax bill. Penalties apply for both failure to file a return and failure to pay your tax, which means that you can reduce your penalty and interest burden by filing as soon as possible, even if you can’t pay. 

If you can’t pay what you owe by October 15, consider these options. If you’re ready to pay what you owe, here’s how to pay in full. Just don’t ignore your outstanding tax bills. Congress has become more aggressive with enforcement, authorizing private debt collectors and seizing passports for failure to pay. 

Besides, it might not be as bad as you think: most taxpayers reported lower tax obligations in 2019, thanks to the Tax Cuts and Jobs Act (TCJA). And for those who might be surprised to find out that they owe not only taxes but also underpayment penalties, the IRS has advised that some relief may be available. The IRS announced earlier this year that it is waiving the estimated tax penalty for those eligible taxpayers who filed their 2018 federal income tax returns and made payments of at least 80% of the tax shown on the return for the 2018 taxable year. Since the announcements were rolled out after some taxpayers filed their returns, there is an automatic waiver for any eligible taxpayer who filed earlier this year. However, if you are filing on extension, the IRS urges you to claim the waiver when you file. The penalty waiver should appear automatically if you use a tax software package. If you choose to file on paper, you’ll need to fill out form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (downloads as a PDF) and attach it to your 2018 return. 

And, of course, your tax professional would want me to remind you that you need not play chicken with the deadline: You don’t have to wait until October 15 to file. Get your tax documents to your professional or e-file your tax return as soon as possible–you don’t have much time left!

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