Using Your Income Tax Refund to Save by Buying U.S. Savings Bonds

1. Is this new? Could a refund previously be used to buy U.S. savings bonds?
This option was available for the first time in early 2010. Improvements are now available beginning January 2011. There are more registration options for owners and beneficiaries; you can elect direct deposit or check in the mail for any unused portion of your refund.

2. If I get a refund on my federal income tax return, can I direct the IRS, on my tax return, to help me save part or all of it by direct deposit?
Yes, you can. When you file your tax return, you can tell the IRS you want to save part or all of your refund and have the rest sent to your checking account. You can save part or all of your refund by submitting Form 8888, Allocation of Refund (Including Savings Bond Purchases) when you file your return. Follow the instructions on Form 8888 to tell the IRS to make a direct deposit of the amount you designate to an IRA, to buy U.S. savings bonds, to make a direct deposit to a savings or checking account or other savings vehicles.

3. If I want to use part or all of my refund to buy U.S. I Savings Bnds, do I need to have previously set up an account with the Treasury Department?
No, you don't need to open an account in advance with Treasury. Follow the instructions on IRS Form 8888, and after you file your tax return with this form, the IRS will arrange for your U.S. savings bonds to be mailed to you.

4. Do I have to have a bank account in order to purchase U.S. Series I Savings Bonds with my tax refund?
No, you don't need to have a bank account to purchase I bonds with your federal tax refund. If you purchase I bonds with your 2010 tax refund, you can elect to have any remaining refund amount not used to purchase bonds mailed to you as a paper check.

5. Do I have to use all of my refund to purchase bonds?
You can use all or part of your tax refund to purchase I bonds. Your request for bonds must be in increments of $50. Any remaining refund amount not used to purchase bonds will be mailed to you as a paper check or you may elect to have the remaining amount direct deposited into a checking or savings account.

6. What kind of U.S. savings bonds can I buy using this streamlined tax refund method?
Series I U.S. Savings Bonds. These Series I Savings Bonds are a low-risk, liquid savings product. While you own them, they earn interest and provide protection from inflation. Although Savings Bonds are not marketable, in the sense that they cannot be bought or sold in a secondary securities market, they can generally be redeemed for principal and accrued earnings at any time after 12 months. See details below.

7. What amounts of Savings Bonds can I buy using this streamlined tax refund method?
You can buy Savings Bonds in increments of $50. You buy them at face value, meaning if you pay $50 using your refund, you get a $50 Savings Bond. In any single calendar year, you can buy up to a total of $5,000 of U.S. savings bonds of any series whether using your refund or some other method. If you buy $250 or less of Savings Bonds with your refund, then $50 Savings Bonds will be issued. If the amount is over $250, then $50 Savings Bonds will be issued up to $250 and the fewest possible additional Savings Bonds will be issued for the remaining amount in denominations of $100, $200, $500, or $1,000.

8. Could you give an example of how this would work?
Example: Bill is entitled to a $2,500 federal income tax refund. He decides to save $1,000 of the refund by buying Savings Bonds, to save another $1,000 by having the IRS direct deposit that amount to his IRA, and have the IRS direct deposit the remaining $500 to his checking account. Bill gives the IRS these instructions by completing Form 8888 and attaching it to his Form 1040. On the Form 8888, he checks the appropriate checking or savings boxes, gives the IRS the routing and account numbers for his IRA and checking accounts, and completes the information specified in the Form 8888 instructions for the bond purchase. Six $50 Savings Bonds, one $200 Savings Bond and one $500 Savings Bond will be mailed to him.

9. Although Savings Bonds may generally be redeemed at any time, are there any redemption restrictions or penalties for early redemption?
Savings Bonds are designed as longer-term investments, and generally cannot be redeemed during the first 12 months after you buy them, unless you live in an area affected by a disaster, such as a flood, fire, hurricane or tornado. Waivers for areas affected by disasters are announced on the Treasury Direct website. If you redeem a Savings Bond within the first five years, the three most recent months' interest will be forfeited. After five years, no penalty will apply.

10. Will I get actual paper bond certificates?
Yes. Savings Bonds purchased with a tax refund will be issued as paper bond certificates in your name. If you are married and filed a joint return, the Savings Bonds will be issued in your name and your spouse’s name. If you purchase savings bonds for someone else, the bonds will be issued in the name(s) that you listed on Form 8888.

11. Can I buy Savings Bonds for a child, grandchild or someone else using this tax refund method?
In the 2011 tax filing season, when you file your taxes for tax year 2010, you can use your refund to buy Savings Bonds and designate ownership or co-ownership for someone else, such as a child, grandchild or anyone, or elect a beneficiary using Form 8888.

12. How is interest on Savings Bonds calculated?
The interest rate for Series I Savings Bonds combines two separate rates:

• A fixed rate of return, which remains the same throughout the life of the Savings Bond. The fixed rate of return is based on the average market yields of the benchmark 10-year Treasury inflation-protected marketable security, adjusted for the unique attributes of Savings Bonds, such as the tax deferral feature.

• A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers. Treasury's Bureau of the Public Debt announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September. Interest is credited on the first day of each month, and interest is compounded semiannually based on each Savings Bond’s issue date.

Or

• Accrual Basis Reporting
You report interest annually each year as it accrues. Once you start, you must continue to report interest earned annually for all savings bonds and notes you own and any you may acquire. This may be advantageous for I Bonds in a child’s name.

• Cash Basis Reporting
Federal tax is deferred until the year of final maturity, redemption, or other taxable disposition, whichever is earlier.

If you choose to report interest annually, you may want to get a copy of Public Debt Form 3501. This table compares the value of your bonds from one year to the next and will help you determine how much interest you should report. The online Savings Bond Calculator at www.TreasuryDirect.gov can also help you determine your year-to-date earnings for the calendar year.

If you choose to defer interest reporting, refer to Publication 550 for instructions.

13. Are there any limits on how long a Savings Bond accrues interest?
The Savings Bond accrues interest until it's redeemed or if earlier, until it reaches final maturity in 30 years.

14. Where can Savings Bonds be redeemed?
Savings Bonds can be redeemed at most financial institutions.

15. How are Savings Bonds taxed?
Savings Bond interest is exempt from state and local income tax. Savings Bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first. You also have the option of claiming interest annually for federal income tax purposes. Savings Bonds are not exempt from any applicable estate, inheritance, gift or other excise taxes, whether federal or state. Tax benefits also may be available when redemption amounts are used to pay education expenses.

16. What tax benefits may be available if Savings Bond redemption amounts are used to pay education expenses?
Qualified taxpayers may be able to exclude all or part of the interest earned from eligible Savings Bonds issued after 1989 when paying qualified higher education expenses. Savings Bonds must be issued in the name of a taxpayer age 24 or older at the time of issuance. Other restrictions and income limits apply. For example, for single taxpayers, the tax exclusion begins to be reduced with a $67,100 modified adjusted gross income and is eliminated for adjusted gross incomes of $82,100 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $100,650 modified adjusted gross income and is eliminated for adjusted gross incomes of $130,650 and above. Married couples must file jointly to be eligible for the exclusion.

17. What if a paper Savings Bond is lost, stolen, or destroyed?
The Bureau of the Public Debt is authorized to replace lost, stolen, or destroyed Savings Bonds. You can file a claim by writing to: Bureau of the Public Debt, Parkersburg, West Virginia 26106-7012. You will need to complete BPD Form PD F1048. You should keep records of your Savings Bond serial numbers, issue dates, and social security or taxpayer identification numbers in a safe place. This information will help speed up the replacement process.

18. What if I want to have a Savings Bond reissued, as in the case where I want to add another individual as a co-owner or a beneficiary?
You can arrange to have a Savings Bond reissued. Under certain circumstances, however, the reissuing will be a taxable event for federal tax purposes and will require the interest earned on the Savings Bonds to be reported as income in the year the reissue occurs.

19. How long will it take to get my Savings Bonds?
Your Savings Bonds are ordered after the IRS completes processing your tax return. Once ordered, it may take up to three weeks for your Savings Bonds to arrive in the mail. If you’re having a portion of your refund deposited directly into your bank account, you may receive your refund before your Savings Bonds arrive by mail.

20. What if there’s a mistake on my tax return?
If you make an error figuring your refund, the bond request is not a multiple of $50 or your refund is offset to cover a debt for any reason, the entire amount of your refund will be sent to you in the form of a check.

21. Whom do I contact if I don’t get my Savings Bonds?
The first step is to check the status of your refund by going to the “Where’s My Refund” feature on www.irs.gov or calling 1-800-829-1954. You can generally get information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. If the IRS has processed your refund and placed the order for your Savings Bonds, you will need to contact the Treasury Retail Securities Site in Pittsburgh at 1-800-245-2804 to inquire about the status of your Savings Bonds.

22. I forgot a deduction on my original return and am filing an amended return for an additional refund. Can I split this additional refund?
You cannot split a refund on an amended return. At this time, IRS does not offer a direct deposit option for refunds on amended returns. IRS will mail you a check for the amount of your additional refund to the address shown on your amended return.

23. Can you convert savings bonds to electronic format?
The SmartExchange program offered through TreasuryDirect allows TreasuryDirect account holders to convert their bonds to electronic securities. TreasuryDirect account owners can also convert paper bonds purchased as gifts for someone else. Electronic bonds can be redeemed in full or in part anytime – 24 hours a day, seven days a week.