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Tax Refunds: A “Savable Moment”

March 2008

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers NJAES Cooperative Extension

In the education field, events called “teachable moments” exist when people seek out the information they need to cope with a situation in their life, make an important decision, or complete a necessary task. Teachable moments also exist outside the classroom and can include both positive and negative life events such as the receipt of a windfall (e.g., an inheritance) and a loss or reduction in income. When you experience a “teachable moment,” recognize it as such and try to take positive action.

The same is true for “savable moments.” These are times when extra money becomes available to save for future financial goals. A common “savable moment” for many people is when their federal and/or state tax refund is received. It is wise to take advantage of “savable moments” to increase your wealth over time.

In an effort to encourage people to save their federal tax refund, the Internal Revenue Service (IRS) allows taxpayers to have their refund divided (split) and direct-deposited into up to three separate accounts. The accounts may be at any U.S. financial institution that accepts direct deposits. Accounts to which tax refunds can be direct deposited are not restricted to regular checking and savings, but may include traditional and Roth individual retirement accounts (IRAs), health savings accounts (HSAs), Coverdell education savings accounts, and individual development accounts (IDAs). Additionally, tax refunds do not have to be split equally. Taxpayers can have their refund divided any way they choose provided that each deposit is at least one dollar.

Taxpayers still have the options of either receiving a paper-check or having their entire tax refund direct-deposited into just one account. People electing one of these traditional methods will continue to indicate their choice on Forms 1040, 1040A, or 1040 EZ. However if they want to split their refund between two or three accounts, they will have to complete an additional form, Form 8888, Direct Deposit of Refund to More Than One Account. This form tells the IRS how much, and to which accounts, they want their refund deposited.

Instead of choosing between depositing your refund into a checking or savings account and later moving part of it to another account, you can split your refund among up to three different accounts and send your money where you want it the first time. Plus, you get the safety and speed of direct deposit. You can split your refund whether you file your tax return electronically or on paper. However, the IRS recommends using e-file to avoid simple mistakes that could change the amount of your refund, and therefore the amount available for deposit.

Splitting your refund will not cause a delay in receiving your money. In fact, because refund splitting uses direct deposit technology, funds will be in your account(s) faster than if you opt to receive a paper check. You have the flexibility of dividing and directing your refund any way you want. There is no requirement to make the deposits equal. You cannot, however, split your refund between a direct deposit and paper check.

You can direct your refund to either a checking or savings account but you cannot opt for direct deposit of a tax refund into a loan account. In addition, you cannot direct your refund to someone else’s account (except to your spouse’s account, if it is a joint refund and your financial institution allows it), such as the account of a tax preparer to pay your tax preparation fee.

If you split your refund among multiple accounts and make a mistake that results in a larger refund than expected, the IRS will add the difference to the last account designated on Form 8888. This is referred to as the “bottom-up rule.” If the mistake results in a smaller refund, the IRS will also use the bottom-up rule and deduct the difference from the amount designated for the last account shown on Form 8888. If the difference exceeds the amount designated for the last account, the IRS will deduct the remainder from the amount designated to the next account up from the bottom and, if necessary, from the first account listed. For further information about split tax refunds, see