Small Business Taxes & Management^TM--Copyright 2008, A/N Group, Inc.

No good deed goes unpunished. Seemed so straight forward. If you provided the IRS with your bank account number on your tax return, the Service will deposit your refund into your checking or savings account. To save time and speed the Economic Stimulus Payments to taxpayers, the Service will automatically deposit your payment into the account provided on your tax return. But when you filed your return you could have asked to have your refund deposited into an account that is given favorable tax treatment under the Code, such as an IRA, a health savings account (HSA), an Archer MSA, a Coverdell education savings account (CESA), or a qualified tuition program account (QTP or section 529 program). If you asked for direct deposit of your income tax refund to be deposited into one of these accounts, your Economic Stimulus Payments will also be deposited there. The Economic Stimulus Payment for a taxpayer who elected to directly deposit his or her 2007 refund into more than one account, however, will be sent as a check and will not be directly deposited into any of the taxpayer's accounts.

The IRS has announced that Economic Stimulus Payments directly deposited into IRAs and other tax-favored accounts may be withdrawn tax-free and penalty-free.

This relief is designed to help taxpayers who may have been unaware that by choosing direct deposit for their entire regular tax refund, they were also choosing to have their stimulus payment directly deposited as well. If a taxpayer elected a split refund, however, their stimulus payment will be paid by a paper check.

Thus, for example, a taxpayer whose $1,200 stimulus payment is directly deposited into his or her IRA can take out anywhere up to $1,200 from the IRA, tax-free and penalty-free.

This relief is available for amounts withdrawn from these tax-favored accounts that are less than or equal to a taxpayer's directly deposited stimulus payment. Without this relief, taxes, penalties and other special rules would apply to amounts removed from these accounts. Regular refunds are not eligible for this relief.

In general, the deadline for these withdrawals is the due date or extended due date for filing a 2008 return. This means April 15, 2009, for most taxpayers, or Oct. 15, 2009, for those who obtain tax-filing extensions. In the case of a CESA, the later of May 31, 2009, or the time for filing the taxpayer's income tax return for 2008, plus extensions.

The amount withdrawn is treated as neither contributed to nor distributed from the account. Thus, the amount withdrawn will not be subject to regular federal income tax nor to any additional tax or penalty under the Code.

The Service recognizes that financial institutions may not be able to distinguish these contributions and distributions from others that may occur. Therefore the financial institution receiving the direct deposit of the Economic Stimulus Payment and making the distribution should report the deposit and distribution in the usual manner. Taxpayers who choose to withdraw their Economic Stimulus Payments will receive instructions in their Form 1040 package that will allow them to report the distribution on their individual income tax return in a manner that shows that the amount withdrawn is not subject to taxes or penalties.

--Last Update 05/01/08