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.)

IN PICTURES: 9 Ways To Use A Tax Refund

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
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.

Savings Bonds
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.)

IN PICTURES: Top 10 Solutions For A Big Tax Bill

Direct Deposits
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.

Prepaid Cards
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.

Related Articles
  1. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  2. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  3. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  4. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  5. Retirement

    Top Tips for Minimizing Taxes on Social Security

    Social Security benefits are taxable under certain circumstances. Here are some ways retirees can lessen the tax burden.
  6. Term

    What is Wealth Management?

    Wealth management combines financial and investment advice, accounting and tax services, and legal and estate planning.
  7. Taxes

    Top Tips for Minimizing Taxes on Severance Pay

    A look at the top ways to lessen the tax burden on severance pay.
  8. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  9. Taxes

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  10. Economics

    Understanding Deferred Income Tax

    Deferred income tax is a liability on a balance sheet that reflects income tax that is allocable to the current period, but has not yet been paid.
RELATED TERMS
  1. Duty Free

    Goods that international travelers can purchase without paying ...
  2. Wealth Management

    A high-level professional service that combines financial/investment ...
  3. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  4. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  5. Average Cost Basis Method

    A system of calculating the cost basis on mutual fund positions ...
  6. Crummey Trust

    An estate planning technique that can be employed to take advantage ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  3. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  4. Are Social Security benefits taxable after age 62?

    Eligibility to collect Social Security benefits begins at age 62. Many seniors, to collect larger benefit amounts, wait until ... Read Full Answer >>
  5. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
  6. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!