Receiving Series I US Savings Bonds as part of 2010 Tax Refund

This year, the IRS is extending its option for taxpayers to receive Series I US Savings Bonds instead of a cash refund. This option first began in early 2010.

Savings Bonds are a low-risk, liquid savings product that adjusts for inflation. Bonds include interest rate bump-ups every six months while earning interest and providing protection from inflation. Bonds may be redeemed at any time, however, since they are designed as long-term investments, they generally cannot be redeemed within the first 12 months after purchase. If the bonds are redeemed within the first five years, the three most recent months’ interest will be forfeited. If the bonds are redeemed after five years, there will be no penalty. Interest will accrue until the bond is redeemed or until it reaches its final maturity in 30 years.

Savings bond interest is exempt from state and local tax, but is subject to federal taxation. Even though the interest earned on savings bonds are subject to federal income tax, the income does not have to be reported until redemption or maturity. If beneficial for tax purposes, however, the interest may be claimed annually.

Last year, if the taxpayer chose to receive a savings bond as part of their refund, the only available option was to issue the savings bond in his/her name. This tax year, the IRS is continuing to allow the purchase of savings bonds with the additional option of designating another person as the co-owner or beneficiary.

Taxpayers may request their savings bond by filing Form 8888 known as Allocation of Refund (Including Savings Bond Purchases) and attaching it to their tax return. The Savings Bond will be mailed to the person designated on the form.

The entire refund does not have to be used to acquire Savings Bonds. The taxpayer may split the refund between the bond, payments to retirement accounts, mutual funds, or cash. A maximum of $5,000 of refund can be used to purchase US Savings Bonds. The bonds are available in $50 increments. Should the taxpayer choose to allocate a portion of the refund to purchase the savings bond, any remaining amount designated to be received as cash will be refunded either in the form of paper checks or direct deposit, as specified by the taxpayer on Form 8888.

Last year, the IRS reported that the agency received 22,500 tax returns requesting over 99,000 savings bonds totaling $11,190,200.

Should you have any questions about this program, contact your Marcum Tax Professional.