What is a Tax Refund?
A “tax refund” is the excess amount of income tax that a taxpayer has paid to the state or federal government through the last financial year. In a few special cases, taxpayers may even receive a refund even if they owed no taxes, because certain tax credits are fully refundable.
As tempting as it may be to enjoy your tax refund, it is wiser to get the tax refund as a direct deposit in your bank account, and it is also simpler and wiser. Through this way, not only will you be spared the possibility of someone stealing your check out of the mail, you will also be less tempted to spend it,
For people who like to save for their future, there is a better way to avoid spending your tax refund. You can have it directly deposited into an individual retirement account or purchase U.S. savings bonds with it.
Some institutes may also allow you to directly deposit your refund into other types of accounts like college saving plans or mutual funds.
Why You Get a State and Federal Tax Refund
Taxpayers may receive refunds for a variety of reasons or may even owe the government money in some circumstances. When you started working for an employer, you had to complete a W-4 form. You specified on that form how much tax was to be deducted from each paycheck.
When too much money is withheld from their taxes, the taxpayer gets a reimbursement at the end of the yearr. If you overpay your expected taxes and are self-employed, you receive a tax refund. You would possibly think of this extra earnings as free money, however in reality, it’s greater like a loan you gave the IRS without charging interest. If you overestimate your tax liability, however, you may owe money to the government.
Form 8888: Allocation of Refund
One way of depositing your tax refund in an IRS account is through IRS Form 8888. IRS Form 8888, Allocation of Refund, allows you to split your refund into a maximum of three direct deposit accounts; where you need to supply the account number and routing number for each account. These routing numbers should be verified with your financial institutions instead of blankly copying routing numbers from your checks.
This type of tax refund can only be applied to traditional, Roth, or SEP-IRA accounts and not simple IRA accounts. The IRA administrator is generally the only one who will supply the routing number and proper account number to use.
These may not be your standard account numbers but might be modified versions of those to fit the standard IRS format. In addition to this, you also need to know whether to designate your account as “checking” or “savings”.
Also it is very important to make sure that the tax refund deposit is received before the typical filing deadline of 15th April, and also let your custodian know that it is a contribution for which financial year.
Another point to keep in mind is that this contribution counts against IRA limits, which are $ 6,500 for the 2023 and $ 7,500 if you are over 50 years old.
Turning Your Refund into Bonds
Another way of using your tax refund is the Part II of Form 8888. This part allows you to purchase Series I U.S. savings bonds in $50 increments up to $5,000 without registering on TreasuryDirect.gov, where all other bonds must be obtained. The advantage of these bonds is that these bonds are the only remaining paper bonds that can be bought. All other savings bond sales are handled and stored electronically.
This paper bond purchase allows you to buy bonds beyond the $10,000 limit per year that applies to electronic bond sales. Also if you have a large enough tax refund, you can purchase up to $15,000 in bonds by this route; $10,000 electronically and $5,000 in paper bonds.
Another plus point of these bonds is that they can be registered as a single owner, co-owner, or beneficiary bonds. Beneficiary bonds are popular purchases by families who have children.
Though there are numerous advantages of Form 8888, there are a few limitations as well which you need to be aware of before setting up a direct deposit of your refund. But bonds are a safe way to help you save for your future and make sure you have a comfortable income to fall back on when you retire.
When Can I Expect My Tax Refund?
According to the Internal Revenue Service (IRS), “most refunds are issued in less than 21 calendar days.” Your refund won’t come until early March if you claim the additional child tax credit or the earned income tax credit.
How Do I Check on the Status of My Tax Refund?
If you want to check out the status of your most recent tax return that was filed within the last two tax years, use the Where’s My Refund? tool provided by the IRS.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.