Tuesday, March 1, 2011

Gifting your Tax Refund

Here's the way it works:

For 2010 tax returns, new savings bond options are now available. Last year, if the taxpayer chose to receive a savings bond as part of the refund, it could only be issued in the taxpayers’ name. This year, those receiving tax refunds can buy savings bonds for themselves and up to two other individuals. Taxpayers can designate anyone to receive a savings bond and also designate the co-owner or beneficiary.

Taxpayers who claim a tax refund on Form 1040 can use Form 8888, Allocation of Refund (Including Savings Bond Purchases) to split their refunds. Refunds can be directed into bank accounts and other financial institutions where their mutual funds or retirement accounts are managed and to purchase U.S. Series I Savings Bonds.

Taxpayers can choose to use a portion of the refund to buy up to $5,000 in low-risk savings bonds, which earn interest and protect owners against inflation. The bonds must be purchased in $50 increments. Any remaining refund amounts can be refunded by paper checks or direct deposit.

The savings bonds purchased through the refund program are U.S. Series I Savings Bonds. Their composite interest rate consists of a fixed rate and an inflation-based rate, adjusted every six months, on May 1 and November 1.

For more details, see the instructions for Form 8888, available by emailing me, or from

Did you Take an Early Distribution from Your Retirement Plan? Considering it?

Some of you may have needed to take an early distribution from your retirement plan last year. Or you may be thinking about it. However,you need to know that there can be a tax impact to tapping your retirement fund.

Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions. Early distributions are usually subject to an additional 10 percent tax.

Distributions you rollover to another IRA or qualified retirement plan are NOT subject to the additional 10 percent tax. But, a very important but, you must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.

If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.

For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, please contact me to discuss your individual tax situation.

IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs) are also available at or by calling 800-TAX-FORM (800-829-3676).