Looking for money to invest this year? Why not try splitting your 2008 federal income tax refund and investing part of the money you get back? In an effort to encourage saving, the Internal Revenue Service (IRS) allows taxpayers to have their tax refund divided (split) and direct-deposited into up to three separate accounts. The accounts may be at any bank or financial institution (credit union, brokerage firm, mutual fund company, etc.) that accepts direct deposits. The accounts to which tax refunds can be direct deposited are not restricted to regular checking and savings, but may include traditional and Roth individual retirement accounts (IRAs), health savings accounts (HSAs), Coverdell education savings accounts (ESAs), and individual development accounts (IDAs). Additionally, tax refunds do not have to be split equally. Taxpayers can have their refund divided in any way they choose provided that each deposit is at least one dollar.
Taxpayers still have the options of either receiving a paper-check tax refund or having their entire refund direct-deposited into just one account. Taxpayers electing one of these traditional methods will continue to indicate their choice on Forms 1040, 1040A, or 1040 EZ. However if they want to split their tax refund between two or three accounts, they will have to complete an additional form, Form 8888, Direct Deposit of Refund to More Than One Account. This form tells the IRS how much, and to which of their accounts, they want their tax refund deposited.
A split refund lets you divide your refund, in any proportion you want, and direct deposit the funds into up to three different accounts with U.S. financial institutions that will accept a direct deposit. Instead of choosing between depositing your refund into a checking or savings account and later moving part of it to another account, you can allocate your refund among up to three different accounts and send your money where you want it the first time. Plus, you get the safety and speed of direct deposit.
You can split your refund whether you file your tax return electronically or on paper. However, the IRS recommends using e-file to avoid simple mistakes that could change the amount of your refund, and therefore the amount available for direct deposit. You can split your refund on an original return filed on any of the following tax forms: Form 1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, 1040-SS, or 1040-PR. However, you cannot split your refund if you file Form 8379, Injured Spouse Allocation.
Splitting your refund will not cause a delay in receiving your money. In fact, because refund splitting uses direct deposit technology, funds will be in your account(s) faster than if you opt to receive a paper check. You have the flexibility of dividing and directing your refund any way you want. There is no requirement to make the deposits equal. You cannot, however, split your refund between a direct deposit and paper check. You can either opt for the safety, security and speed of direct deposit to one, two, or three different accounts or request your refund via a paper check, but you cannot combine the two.
You can direct your refund to either a checking or savings account but you cannot opt for direct deposit of a tax refund into a loan account. In addition, you cannot direct your refund to someone else’s account (except to your spouse’s account, if it is a joint refund and your financial institution allows it), such as the account of a tax preparer to pay your tax preparation fee.
If you split your refund among multiple accounts and make a mistake that results in a larger refund than expected, the IRS will add the difference to the last account designated on Form 8888. This is referred to as the “bottom-up rule.” If the mistake results in a smaller refund, the IRS will use the bottom-up rule and deduct the difference from the amount designated for the last account shown on Form 8888. If the difference exceeds the amount designated for the last account, the IRS will deduct the remainder from the amount designated to the next account up from the bottom and, if necessary, from the first account listed.
For further information about split income tax refunds, see http://www.irs.gov/faqs/faq-kw195.html.
