Split Refunds: Automatically Increase Your Savings
Split Refunds: Automatically Increase Your Savings
If you're like many taxpayers, you use your tax refund as a "forced savings" plan. You may be using this money right away when you get it for large purchases or moving it into an interest-bearing savings account. Since 2007, the IRS has been making saving your tax refund easier through split refunds.
What is a Split Refund?
Previously, taxpayers had only one option when it came to depositing their tax refund by direct deposit: savings or checking. But now the IRS is allowing for those direct deposits to be split up among up to three different accounts in any proportion you want. This means you can have part of the refund automatically deposited to your checking account for immediate use while depositing the remainder into a savings account. This cuts down on one extra step for those that planned to put some of that money in savings anyway and avoids the temptation to spend it before getting it out of your checking account.
Taxpayers that will benefit most from this are lower income workers. Many of these workers live paycheck-to-paycheck and have no way to put any savings away for emergencies. Most of these families may need their refund check to catch up on bills or pay for basic living expenses, but putting even a portion of this money away automatically will help in the long run.
The only downside to this is that you need to have a checking and savings account set up at a U.S. bank in order to take advantage of the benefits.
How Else Can I Split My Refund?
The IRS also now allows the opportunity to purchase up to $5000 of U.S. Series Savings Bonds from the U.S. Treasury with your refund. Taxpayers can purchase I Savings Bonds with any part of their refund, either in paper bonds or through a TreasuryDirect account (which you can manage online). The minimum purchase for paper bonds is $50 and can be bought in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000. E-bonds through TreasuryDirect can be purchased in any amount to the penny from $25 and up.
I Savings Bonds have an annual interest rate that reflects a combination of a fixed rate and an inflation rate. Interest, if any, is added to the bond monthly and is paid out when you cash in the bond. You must hold these bonds for at least one year and there is a penalty of the three most recent months' interest for cashing them in before five years.
How Do I Split My Refund?
To split you refund, you'll attach Form 8888, Direct Deposit of Refund to More Than One Account, to your income tax return to tell IRS how much and to which accounts you want your refund deposited. If you use an online tax preparation site, the program will ask you for the account information and automatically file this form for you when you submit your taxes.
Remember, to take advantage of splitting your tax refund you must have your refund direct deposited into your accounts. If you do this, split refunds can be a great way to boost your savings without any extra effort at all.