Taxpayers in the United States are confronted with a number of different methods to receive their income tax refund for the year. These include checks, a debit card, direct deposits of funds into a bank account and even purchasing government savings bonds. Each of these methods has advantages and disadvantages that taxpayers should be aware of. (For related reading, also take a look at 5 Ways To Make A Tax Refund Work For You.)
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In the 2010 tax year, the Internal Revenue Service (IRS) processed 109.4 million refunds totaling $328.4 billion, for an average refund of $3,003. Although many taxpayers are excited about receiving a refund, in reality, a refund indicates a misestimate and overpayment of the taxes owed. When you receive your refund this year, consider that you have actually given the government an interest free loan and they are finally giving it back to you.
The IRS offers three choices when it comes to receiving a refund. Taxpayers can go with the traditional method of getting a paper check in the mail, receive a direct deposit, or use the refund to purchase savings bonds from the government. Taxpayers that use an outside company to prepare or file taxes have an additional option and can put the refund on a prepaid debit card.
Checks are the traditional method of receiving tax refund and are still preferred by many taxpayers. This may be due to ignorance of other methods, general resistance to change or a distrust of the security features protecting electronic payments. This is also the slowest method of receiving your tax refund.
In 2010, the IRS offered taxpayers the choice of using their refund to purchase U.S. Series I Savings Bonds. Taxpayers fill out Part II of IRS form 8888 and include the form when they file their return. The IRS limits savings bonds purchases to a maximum of $5,000 in increments of $50.
One advantage of the U.S. Series I Savings Bonds is that the return is composed of a fixed rate plus an inflation rate added to the bonds every six months based on the Consumer Price Index for all Urban Consumers. Unfortunately, even with this added return, these rates are extremely low, with the most recent six month combined return at only 0.37%.
Taxpayers purchased $11 million in savings bonds last year as part of this program, and the IRS is hoping to increase participation by allowing filers to buy bonds for up to two additional people, or put a co-owner or beneficiary on the bonds. (For more related information, see Taxation Rules For Bond Investors.)
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Direct deposits are the most popular method of receiving a tax refund from the IRS. In the 2010 tax filing season, the IRS paid out $238 billion in 74.6 million refunds via direct deposits. Direct deposits have the advantage of being the quickest way to receive a refund, and the IRS even offers the option in some cases of splitting this direct deposit between different accounts. Taxpayers can select up to three accounts to receive the refund on Form 8888 and even have the option of making a contribution to an IRA account via a direct deposit.
Many tax preparation companies allow taxpayers to place their refunds onto debit cards for convenience. H&R Block (NYSE:HRB) offers the Emerald Prepaid Mastercard to its customers, which can be used while shopping, to pay bills or to make withdrawals at ATMs. Competitors of H&R Block offer similar products to its customers.
These debit cards are the most convenient method of receiving a tax refund, there are fees that come with this convenience. While it is free to load a tax refund onto the card, there are a number of other fees charged by H&R Block that individuals should check into before choosing this offer. These include ATM withdrawal fees and a monthly inactive account fee if the card is not used.
The Bottom Line
Tax refund season will soon be here, and taxpayers have many different choices when receiving their refund. These include the traditional check or a direct deposit into as many as three different bank accounts. Taxpayers can also put refunds onto a debit card arranged by independent tax preparers or direct the IRS to purchase inflation indexed savings bonds with their refund.