Source: Wall Street Journal
With interest rates on I Bonds set to approach 10%, taxpayers can use their tax refunds to buy more than the normal $10,000 limit.
Sending your tax refund back to Uncle Sam could net you an attractive return.
While most people tend to take their refunds in cash, taxpayers can choose to receive them as inflation-adjusted U.S. savings bonds, the interest on which is currently 7.12% and will rise to nearly 10% beginning in May.
There is a $10,000 annual limit per person for I Bonds, but it is possible to exceed that ceiling by accepting the bonds in lieu of a cash tax refund.
The deadline to file taxes is April 18, but even if you take your refund now, the I Bond’s interest rate resets every six months. April I Bond buyers would get roughly 9.6% starting October.
How does the I Bond tax-refund program work?
Up to $5,000 of your tax refund is eligible to be put into I Bonds a year, under the Internal Revenue Service program.
The I Bonds are available in $50 increments, and you can elect to have the remaining portion of a refund not used to purchase I Bonds to be directly deposited into your financial institution, your TreasuryDirect account or mailed to you as a check, said Pamela Ladd, senior manager for public accounting for the American Institute of Certified Public Accountants. For instance, a married couple filing jointly could purchase $5,000 in total with their refund.
When you purchase savings bonds with your tax refund, you’ll receive paper bonds, issued in your name or the names you designate as a primary owner, co-owner or beneficiary.
You can use your tax refund to buy I Bonds for other people, such as a child or relative, said Elliot Pepper, a financial planner in Baltimore. For example, if you have a $5,000 refund coming, could you get $3,000 in I Bonds for yourself and $1,000 each for two children.
There is a $10,000 annual limit per person for I Bonds, but it is possible to exceed that ceiling by accepting the bonds in lieu of a cash tax refund.PHOTO: ISTOCK
How do I use my refund to buy I Bonds?
If you file your taxes electronically, either with a paid preparer or when you self-prepare, you should be asked by the preparer or the software to provide any relevant information such as the owner’s first and last names for the bond registration.
If you paper-file your tax return, attach a completed Form 8888, Allocation of Refund to your return before mailing it, said Ms. Ladd.
The IRS will forward your request for savings bonds to the Treasury Retail Securities site, which you can contact at (844) 284-2676 to check on the status of your bond issuance.
Make sure to put the paper I Bond in a safe place. George Papadopoulos, a certified public accountant in Novi, Mich., generally doesn’t recommend clients use any refunds to buy I Bonds, partly because he is concerned that people holding paper bonds might lose them. As of April 30, 2021, approximately 80 million savings bonds, totaling $29 billion, have matured but haven’t been redeemed, according to a report by the Treasury Department.
Treasury Hunt, the Treasury Department’s online search engine, can help you find matured, uncashed savings bonds (over 30 years old and no longer earning interest) if you’ve lost your paper bonds. You can also find missing payments on other securities.
You can convert the paper bonds to electronic bonds via the TreasuryDirect website.
What if I’m filing for an extension?
You could file an extension by April 18 and make a 2021 tax-year payment at the time you file the extension equal to $5,000, said Mr. Pepper. Then, when you file by the extended deadline, you’ll know you will likely have a sufficient refund that can be used to buy the I Bonds. Let your accountant know that you want to allocate a portion of your refund to buy I Bonds.
How does the interest on I Bonds work?
I Bonds’ interest rate is compounded every six months and reassessed in May and November each year. For bonds issued from November 2021 through April 2022, the combined rate is 7.12%.
Beginning in May, the interest rate on inflation-adjusted U.S. savings bonds will offer annual interest payments of about 9.6%, based on the bond’s latest inflation-rate calculation, which is tied to March’s consumer-price index.
Mr. Pepper doesn’t get a tax refund. He likes to hedge his annual I Bond investment by splitting purchases into two installments of $5,000 each. He will buy $5,000 before April 30, to lock in the current 7.12% interest rate and then step into the next rate. He then plans to buy the next $5,000 worth in late October to lock in the 9.6% rate.
Waiting until close to when the rate reset lets him make a slightly more informed decision on what his 12-month return will be, he said. For instance, the I Bond he will buy this month will essentially have a 12-month return of about 8.52% (50% at 7.12% and 50% at 9.6% plus compound interest).
The bonds have to be held for at least one year to receive the interest payments. Those who sell them within five years do lose the last three months of interest. The refund method is most beneficial for people who want to exceed the $10,000 annual I Bond cap, said Mr. Pepper. Opting to get your refund in bonds instead of cash can nudge you into spending less and investing more, he said.
Besides using my refund, how else can I buy more I Bonds?
You can buy $10,000 a year for a child by opening up another account under one parent’s name. A trust could also purchase $10,000 in I Bonds a year. If you have a business, it could purchase another $10,000, said Ms. Ladd.