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Want to Save Money? Split Your Tax Refund

February 2007

Liz Gorham, Ph.D., AFC
Extension Family Resource Management Specialist
South Dakota State University Cooperative Extension

Looking for a convenient and painless way to save money? U. S. citizens entitled to a federal income tax refund can now get their money direct deposited in up to three accounts. This is an excellent way to encourage increased savings for emergencies and future financial goals.

By using a new tax form, Form 8888, you can specify one, two, or three accounts (such as checking, savings, and retirement accounts) for depositing your tax refund. Computer users with Internet access can download Form 8888 at

Taxpayers due a refund can indicate the amount they want to direct deposit from their tax return into each account. There is no minimum amount requirement. If you prefer, you can directly deposit the total refund in one account, but you do not need the new form to do this. In the past, you could receive your refund in the form of a check or a direct deposit to either a checking or savings account indicated on Form 1040. This same option is available, but, in addition, you will be now be able to specify more than one account as a direct depositor.

Direct deposits, first offered in 1987, are now being used by about half of all tax refund filers. The Internal Revenue Service (IRS) estimates that 52.7 million refunds, amounting to $134.2 billion, were deposited directly into bank accounts last year. According to IRS Commissioner Mark W. Everson. “The split refund program will give taxpayers the option of depositing a refund into more than one account. Split refunds should encourage saving, and we hope it will dampen demand for refund anticipation loans.

More than 75 percent of U.S. taxpayers are entitled to a federal income tax refund (averaging $2,171) each year. While this can be a good way for some people to force themselves to save money, taxpayers may be better off taking the additional amount and depositing it in an account that would earn interest during the year. This can be done by filing a new W-4 tax withholding form with their employer and increasing the number of withholding allowances claimed. The federal government does not pay interest on tax refunds. However, the federal government has the use of taxpayer money received through payroll withholding until a taxpayer requests the excess when he or she pays taxes by April 15 of every year.

Currently, taxpayers have two options for receiving their individual federal income tax refunds–a paper check or a direct deposit (electronic funds transfer) into a checking or savings account. The electronic funds transfer gives taxpayers the safety and speed of direct deposit. Taxpayers who file their tax return electronically and opt for direct deposit can receive their refund in two weeks or less.

The new split-refund option will allow taxpayers to conveniently deposit their tax refund into their preferred U.S. financial institution(s) as long as they provide valid routing and account numbers. They will attach the new Form 8888 to their return, indicating amounts for each allocation and with information for each account. The ability to split or allocate direct deposit refunds among multiple accounts is available in January 2007 to all individual filers using any of the 1040 series tax forms (e.g., Forms 1040, 1040A, and 1040EZ).