Refund options for the 2011 filing season.

• Author: Chambers, Valrie

2011 REFUND OPTIONS * CORRECTING IRS INTEREST MISTAKES * RECORD RETENTION POLICIES * REVIEW OF INTERNATIONAL PENALTIES PRIOR TO PAYMENT

Tax Practice & Procedures

"Back in the day," federal income tax refunds were cither applied toward the next year's income tax liability or received by paper check. Over time, the options for receiving refunds have expanded to include direct deposit, refund anticipation loans, and splitting refunds among multiple accounts using Form 8888, Direct Deposit of Refund to More Than One Account. Splitting a refund between an IRA and other accounts is especially advantageous because a taxpayer can fund the IRA for the calendar-year tax return with the tax refund for that year if the tax return is filed early enough for the taxpayer to receive the refund and to fund the IRA account before the April 15 deadline. That is, a taxpayer need not use cash out of pocket on the previous year IRA before filing the tax return.

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Beginning in the 2010 filing season for 2009 returns, taxpayers could also purchase up to $5,000 of Series I U.S. savings bonds. This year, purchase options for savings bonds are scheduled to expand to include titling the bonds in the name of a taxpayer and a co-owner, such as a child or a grandchild. The focus of this item is to review the newer refund options: opportunities to fund IRAs for the current tax year with the current-year refund, the purchase of U.S. savings bonds that started last year, and the anticipated forthcoming options for the current year.

Refund Splitting

Since 2007, individual taxpayers have had the option to split direct deposit refunds among up to three different (open) accounts with up to three different U.S. financial institutions that accept direct deposits. Refunds could kind several kinds of accounts, including checking, savings, individual development accounts, IRAs (traditional, Roth, and SEP), health savings accounts, Archer MSAs, and Coverdell education savings accounts.

Refund splitting is subject to both federal income tax rules and the policies of the financial institutions. For example, some financial institutions may not accept a joint refund into an individual account, and if the financial institution rejects the refund splitting request, a paper refund check is sent. If allowed by the financial institution, a refund received by the April filing deadline for tax returns could be used to fund an IRA for the calendar year just ended. The...