Form 8888 and the new 9.62% U.S. Treasury Series I Savings Bond

By Jim Heatherington, CPA, and Suzanne Carolla, CPA

What’s not to like about 9.62% annual interest on a one-to-five-year U.S. Treasury Series I Savings Bond? Some might even argue it’s the best no-brainer investment out there.

Although this article will provide basic information about these specific types of government bonds, additional details are also available at www.treasurydirect.gov.

Interest rate resets

I Bonds reset the interest rate twice per year. The most recent annual interest rate reset occurred on May 1, 2022, from 7.12% to 9.62%, which is compounded on a semi-annual basis. There will be a new rate for bonds issued after Oct. 31, 2022.

This 9.62% rate is effective for the first six months from the date of issuance—based on the current inflation rate as published by United States (U.S.) Bureau of Labor Statistics. The authors of this article doubt the interest rate will lower on Nov. 1, 2022, but will likely lower prior to the 5 years required for maximum earning of interest payments without reduction. To contrast the impact of inflation in the U.S., I Bonds paid a prevailing rate of only 3.54% prior to Nov. 1, 2021.

The good news for bond buyers is that I Bonds pay interest in a similar term as Series EE and HH Bonds, which is 30 years. Upon reaching maturity at 30 years from date of issuance, the bonds will no longer pay interest to the holder.

Redeeming I Bonds

I Bonds require a minimum holding period of one (1) year. If the bonds are held for more than one year, but less than five years, the holder will lose three months of interest.

Reporting interest income

Holders have a choice between reporting interest when the bonds are redeemed or annually as interest accrues. See the explanation on the Treasury Direct website under “Tax Consideration for I Bonds” and IRS Publication 550.

Limit on purchases

There is a limit on I Bond purchases of $10,000 per person per calendar year, not including the Form 8888 election. If you buy $10,000 this October at 9.62%, you can buy another $10,000 in January 2023 at the new rate published in November 2022. Form 8888 can enable an individual to buy an additional $5,000 of I Bonds every year.

IRS form to purchase I Bonds with tax refund

IRS Form 8888 is used to buy I Bonds with your tax refund. You are permitted to buy up to $5,000 in increments of $50, $100, $200, $500 or $1,000. Form 8888 is titled, “Allocation of Refund (Including Savings Bond Purchases)”, and you can utilize the form to deposit your refund in an Individual Retirement Account, Health Savings Account, Coverdell Educational Savings Account or Archer Medical Savings Account. You cannot exceed the applicable limitations. Form 8888 may be used to buy paper savings bonds for up to three other persons. However, the purchase limit may not exceed $5,000 total. Use of Form 8888 results in an investment in paper (not electronic) I Bonds.

Tax planning and investment strategies

The I Bond purchase limits—$10,000 for electronic purchases and $5,000 for paper purchases—with your federal and/or state income tax refunds are doubled for married couples. The purchase limits are applied on the first social security number reported on the account. Also note that you can increase your federal income tax refund by increasing your withholding or estimated payments or by adding to your extension payment on Form 4868.

It's sad to say though that Form 8888 and its instructions are not well-designed. An important feature is buried in a link at the top, right of page 2 of the instructions: http://go.usa.gov/3KvcP. This reference also appears in the middle of page 60 of the Form 1040 instructions. If you go to the link, the guidance there reads, “You can request the IRS or your state tax department to deposit your tax refund directly into your TreasuryDirect account where you can use the funds to purchase savings bonds…”

You are able to do this with three simple entries on lines 35 b, c and d of Form 1040 (page 2). Put the TreasuryDirect routing number, 051736158, on 35b. Check the “Savings box” in 35c, and enter your TreasuryDirect account number in 35d. Note that the $15,000 overall annual limitation applies.

Conclusion

The authors of this article sent questions via email to Treasury.Direct@fiscal.treasury.gov, one of which asked if the tax refund deposit could only result in paper I Bonds. The replies were delayed, the most frequent of which was that they could not reply because of the large volume of emails. The one actual reply received was not responsive to our question.

A note on the website and phone lines: The 9.62% interest rate has generated a lot of interest, which caused the website to crash in May. It seems to work now, but slowly. The telephone number 844-284-2676 works Monday through Friday from 8 a.m. to 5 p.m. Eastern Standard Time, but the most recent reply says “call volumes are unusually heavy.”

These investments should be evaluated for suitability for each investor. The current interest rate paid for I Bonds is very appealing with the recent poor performance in the stock market. 

Suzanne Carolla, CPA, joined Heatherington & Fields with more than 17 years of experience in tax compliance reporting, planning and consulting. Her industry experience includes manufacturing, service industries, construction, real estate and nonprofit organizations.

Jim Heatherington, CPA, is a founding partner of Heatherington & Fields with more than 40 years of experience as a CPA. He was an instructor at the University of Tulsa Graduate tax program for 10 years, and has a variety of experience in accounting, tax and consulting. His industry experience includes manufacturing, service industries, farming, wholesale/retail, real estate and exempt organizations.