Know your best options for receiving, investing tax refund
Taxpayers who are getting refunds have more options in how they receive their cash from the Internal Revenue Service. What used to be the most common form of refund — the check — is now the least effective.
McClatchy-Tribune News Service
With the tax filing season in full swing, taxpayers who are getting refunds have more options in how they receive their cash from the Internal Revenue Service.
What used to be the most common form of refund — the check — is now the least effective. Checks can take a month to receive, while direct deposit can cut that time on half. In addition, direct deposit prevents the chance of the check getting lost or damaged in the mail.
Another option is having the refund deposited directly into an Individual Retirement Account, including a Roth IRA and SEP-IRA. For those who struggled to make IRA contributions last year or want to get ahead and contribute for 2010, the IRS can handle the contribution as long as the amount is $5,000 or less per person or $6,000 or less if over age 50.
New this year is the ability to use a refund to buy U.S. Savings Bonds. Taxpayers can buy I Bonds of up to $5,000, in increments of $50. I Bonds are linked to inflation, therefore have interest rates that go up or down with inflation, and are currently yielding 3.36 percent. The bonds can be redeemed penalty-free after holding them for five years, and then tax will be due on the interest earned. They must be held for 1 year, and if cashed before five years, a penalty of three months worth of interest will be deducted.
To receive a refund in the form of an IRA contribution or Savings Bond, IRS Form 8888 will need to be filed with the return. The form can also be used to have a direct deposit go to different accounts and not just one bank account.
A refund option to avoid is a Refund Anticipation Loan, or RAL. These are offered by tax preparers or payday loan services in which they loan the amount of the refund to the taxpayer in return for receiving the IRS check. The rapid IRS refund times of about two weeks now make those loans unnecessary.
They are also to be avoided because of interest rates charged.
Florida Southern College associate accounting professor John Stancil said he found one loan company charging a 264 percent annual percentage rate on one loan. Loan providers may also provide the funds in the form of a debit card, which can carry additional fees.
Finally, if a large refund is coming your way, you gave Uncle Sam an interest-free loan. If you expect your income to be the same for 2010, use your 2009 return to calculate how much you should be withholding to avoid withholding too much for next year.