tax-refund-and-savings-bondsThe IRS issues a tax refund when the tax liability of the filer is less than the taxes withheld or paid during the tax year. Withholding calculators are available to assist taxpayers in determining the amount of taxes to withhold throughout the year.  When the withholding amount matches the actual amount of taxes owed, more money remains in your paycheck instead of in the hands of the government.  It would be the best situation for taxpayers, however, it is not a foolproof strategy.  There may be times when a tax refund is still owed to the filer.  The recipient then has the option to either spend or save their refund.  Those interested in saving may want to consider purchasing US savings bonds. This year the IRS announced you could buy U.S. I Series Bonds for someone else other than yourself.  Here we look at this option and how you can make it work for you.

How does it work?

When you decide to save your income tax return, the IRS is very accommodating in helping you get your funds to the desired location.  Tax refunds do not have to be handled or distributed by the taxpayer.  The IRS can direct the specified amount of money toward the purchase of savings bonds, direct deposit into a savings account or individual retirement account.

What is Form 8888?

Before the IRS can distribute your tax refund, they must first receive direction from the taxpayer. To do this, the taxpayer must file Form 8888 when filing their tax return.  Part 2 of Form 8888 is used to instruct the IRS how you would like to distribute your refund money.  You may use all or part of your refund toward the purchase of I Bonds.  If the entire refund is not being used toward the purchase of savings bonds, this section allows the filer to direct the IRS on the handling of the remaining amount.

Are paper bonds issued?

Paper bonds will be issued when using this method of purchase.  When the IRS processes the return, Form 8888 instructions will be used to direct the purchase of the savings bonds.  Depending on the purchase amount, the savings bonds may be issued in increments ranging from $50-$1,000.  Paper savings bonds will be issued and mailed per the instructions provided by the filer.

Is there a limit to how many savings bonds I can purchase?

The IRS does not set limits on individual purchases of savings bonds via income tax refunds. This means the filer can decide how much or little they wish to purchase as long as the amount falls within the established limits for all series savings bonds.  This means the minimum purchase would be $50 with a maximum amount of $5,000 in a single calendar year.  In other words, there are established limits for all buyers of savings bonds, regardless of the method used to purchase the bonds. As long as individual filers stay within those limits, the IRS does not impose any additional min/max requirements.

How are tax return mistakes handled?

Each year the IRS processes the tax returns of millions of filers.  Mistakes are not only expected but anticipated.  Should the IRS find a mistake in your tax return, the request to purchase savings bonds may be canceled.  In this situation, the full refund amount will be issued to the taxpayer.  If the error is in favor of the filer, increasing the refund amount- the IRS will process the purchase request, refunding the difference directly to the taxpayer.