Refund used to purchase series I savings bonds?

Technical topics regarding tax preparation.
#1
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A client wants to buy savings bond with refund, and my software can do that and it prints:

You will receive a refund of $1,290. $290 of your refund will be directly deposited into your checking account. $1,000 of your refund will be used to purchase Series I Savings Bonds.

My questions are:

    - Where do the bonds go? This link https://www.irs.gov/refunds/using-your- ... ings-bonds says the the bonds will be mailed.
    - What is the advantage and disadvantage to purchase through refund? Cannot they just buy the bonds from their broker and they show up on their account electronically?
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#2
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I wouldn't mess with the IRS and paper bonds. They can create an account at https://www.treasurydirect.gov and purchase the bonds there.
 

#3
NYCCPA  
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Where do the bonds go?...

See https://www.treasurydirect.gov/indiv/pr ... glance.htm

Edit: I would assume they are to be mailed to the address on the tax return...

Benefit?...

Saw this on the NYSSCPA forum. If i'm not mistaken there is a max that an individual can buy. I believe 10k/year. Purchases made through your tax refund can be in addition to the $10k limit. I.e. I can buy $10k myself via Treasury Direct. But If I want to purchase anymore during a given year it has to be through my tax refund. Even then I believe it may be capped at $15k total, but don't quote me on that part.
 

#4
JAD  
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Yes, that is correct. $10k annual max through Treasury Direct. $5k per return allowed, I think they mail you paper bonds. So if you are married, $25k per year max allowed.
 

#5
s054  
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That is the advantage of requesting a paper I-bond on the return - an additional allowance of $5000 for the year, for a total of $15000, which would have been capped at $10000 per SSN. Would assume that on an MFJ return the extra allowance amounts should be split 50/50, since I-bonds cannot be bought jointly.
 

#6
JAD  
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Is that correct? Line 4 of Form 8888 says

"Amount to be used for bond purchases for yourself (and your spouse, if filing jointly)"
 

#7
s054  
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On second thought, the paper I-bond could be added to an account at treasurydirect.gov, and it only allows individual accounts. So whichever spouse decides to put in in their account, would have an additional up to $5000 allowance for buying I-bonds, for that year.
 

#8
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s054 wrote:On second thought, the paper I-bond could be added to an account at treasurydirect.gov, and it only allows individual accounts. So whichever spouse decides to put in in their account, would have an additional up to $5000 allowance for buying I-bonds, for that year.

What is the mechanism to add the paper I-bond to an account at treasurydirect.gov, i.e. How to? You mail it? The IRS mail it to taxpayer, and taxpayer mail it to treasurydirect.gov? Thanks.
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#9
mariaku  
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They're paying 7.12% interest now.

They are not sold through brokers, only through the Treasury Direct & tax refunds.

I don't believe the $5k limit is per tax return, but per SSN.

All the info is here: https://www.treasurydirect.gov/indiv/pr ... glance.htm
 

#10
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Suppose the taxpayer does not have enough refund, let us say, he owes 1000. Can I file an extension and pay 6000, and then when I file the actual return, buy the 5000 paper bond. Is this a fair play?
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#11
Nilodop  
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I think so. But isn't the only advantage the added $5,000? That's the goal, right?
 

#12
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Nilodop wrote:I think so. But isn't the only advantage the added $5,000? That's the goal, right?

Yes, so that the client has the $5000 refund to buy the paper bond.
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#13
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It’s 6:30am as I type and I’m up much earlier than normal on a Sunday so take that into account.

If tax due is really $1,000 and you pay in $6,000 do you have a valid extension?
 

#14
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SumwunLost wrote:If tax due is really $1,000 and you pay in $6,000 do you have a valid extension?

Logically may not, but does the law prevent paying more taxes? For example, if a single person with proper withholding already pays $1000 extra everything? I know in this case the taxpayer pays more solely for the advantage of buying paper bond, is it legally allowed? Is it ethical?

What is your vote? I would think "Everything which is not forbidden is allowed", just like you can fund your Roth IRA by converting from traditional (backdoor), just like you can move every 2 years and sell a primary home.
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#15
MWEA  
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For what it’s worth, we just had this recently. Taxpayer made a payment on direct pay as “balance due”. We listed it as a fourth quarter estimated payment on the date he paid. Then filed the return a week later. New client, he told me this was how they did it last year without any issues.
 

#16
Nilodop  
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It's no more illegal or unethical than, instead of quarterly estimates for an individual, have the individual pay all or a lot of his tax by way of withholding all or part of his expected year-end bonus.
 

#17
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MWEA wrote:For what it’s worth, we just had this recently. Taxpayer made a payment on direct pay as “balance due”. We listed it as a fourth quarter estimated payment on the date he paid. Then filed the return a week later. New client, he told me this was how they did it last year without any issues.

In your case, the client did not take advantage of the IRS for anything, in fact, he did the IRS a favor by allowing the government to have free use of his money. In my case, the client does take advantage of the IRS by the ability to buy $5000 worth of bond, if it can be called advantage.

I guess the situation is rare and the advantage is small, the law did not add a clause to prohibit it. In other cases, the law does add a clause. For example, when someone left California for a purpose, she can be considered as a nonresident, but the law says if she did this just for the purpose of avoiding to pay CA taxes, then it is not part of the safe harbor.
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#18
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Nilodop, you make a very good point. To be honest, I was just being mischievous.

I'll have to look into I bonds. I have an 81 year old client who emptied his IRA last year. He doesn't want risk and I don't think he needs much for daily living expenses. At the moment, he is getting the usual interest on his savings account at a major high street bank.
 

#19
JAD  
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They are good, but they are limited to $10k per person per year + $5k for the tax refund. But it seems you can also buy through your revocable living trust, even though it is the same SSN, so that brings the annual potential investment to $25k per year. If you file a joint return, the other person is limited to $20k per year since the $5k per year is per return.
 

#20
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It's important to note that interest rate on series I savings bond can and does fluctuate. The current rate is a formula that takes into consideration a fixed rate (currently 0%) and an inflation rate. The latter changes every 6 months.

I didn't know they're currently yielding 7.12% however. Might be a good investment for those who are risk averse and usually have a large portion of their liquid assets in CDs, money market or savings. Thanks for putting this on my radar.
 

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