Funnel tax refund into savings bonds

A few family celebrations are perfect for buying U.S. savings bonds — the birth of a baby, birthdays, confirmations, and high school graduations.

Now, add filing your taxes.

It’s part of a push by the IRS to help put refund money to work for college education or other long-term savings needs rather than recycling the cash back into your wallet.

If you receive a refund, you can buy Series I savings bonds for yourself or you can share the wealth as a gift for up to two children, grandchildren or other loved ones. A pilot program found that the overwhelming majority of people used their refund to buy savings bonds for their children or grandchildren.

The IRS officially launched the program last year, and the agency said nearly 100,000 savings bonds worth about $11 million were purchased.

Uncle Sam has more to promote this year. The IRS added the gift purchase option in time for the start of the tax season, and it changed provisions for designating co-owners and beneficiaries.

The Series I bonds must be purchased in $50 increments up to $5,000, and will be delivered by mail in paper form either to you or the person you designate. Interest accrues every six months at an inflation-adjusted rate. The interest is exempt from state and local — but not federal — income tax.

Bonds bought between now and April’s filing deadline will earn 0.74 percent.

The starting point is IRS Form 8888. This Allocation of Refund form must be included when you file your federal income tax return.

Reconstructing tax records can be a chore

One of the worst catastrophes that can befall a small business owner during tax filing season is receipts and records that are … gone!

Those slips of paper might be missing, destroyed or unreadable. Without them, an owner will find it hard to complete a return and claim all the deductions he or she is entitled to. Or worse, make it through an audit without having deductions tossed out.

If it happens to you, calm down. It’s possible to mitigate the damage by reconstructing your records:

• Banks and credit card companies can send you new statements.

• Suppliers can issue duplicate invoices.

• Anyone who has paid you should be able to give you copies of canceled checks and other paperwork.

• For receipts for purchases and travel and entertainment expenses, credit cards statements can help and might be acceptable to the IRS.

Reminder: You cannot take a deduction for an expense if you don’t have physical proof, usually a receipt, that you spent the money for your business.

Tax refund loans on their way out

The movement to electronic filing of tax returns means refunds are frequently received within days instead of weeks. That has dealt a serious blow to the tax refund anticipation loan industry. For years it’s capitalized on the desire of taxpayers to get refund money in their hands fast.

These loans were used by about 5 million taxpayers last year, and they often are sought by low-income earners living paycheck to paycheck.

Often called “rapid refunds,” the loans are provided by tax preparers in partnership with banks. Applicants borrow the amount of their expected return and repay the loan when the IRS delivers the refund.

Refund anticipation loans at their peak generated more than $1 billion for the tax preparers and banks that offered them. That was in 2002, when 13 million loans were processed.

Industry observers believe rapid refund loans likely will be used by about 2 million tax filers this year.