In IRS Announcement 2008-44 issued on April 30, 2008, the IRS provides special rules for individuals who have payments made by direct deposit under the Economic Stimulus Act of 2008 to their IRAs or certain other tax-favored accounts.  Taxpayers who indicated on their 2007 Federal income tax return that the entire tax refund amount be direct deposited into an IRA, HSA or Coverdell ESA, their Economic Stimulus Payment will be direct deposited into that same account. 

However, if a taxpayer files Form 8888 in order to split their income tax refund into more than one financial account will receive their Economic Stimulus Payment by check and the payment will not be directly deposited into any of the taxpayer’s accounts.

If, and only if, the Economic Stimulus Payment is direct deposited into an IRA, HSA or ESA, the taxpayer is permitted to withdraw an amount less than or equal to the amount of the Economic Stimulus Payment without any tax consequences.  If the withdrawal is made no later than the taxpayer’s tax filing deadline for 2008 plus extensions (or in the case of an ESA the later of May 31, 2009, or the tax filing deadline for 2008 plus extensions), the distribution will not be subject to Federal income tax and will not be subject to any additional tax or penalty under the Code.

Recognizing that financial institutions may not be able to distinguish these contributions and distributions from other reportable deposits and/or withdrawals from the account, the institution receiving the direct deposit of the Stimulus Payment and making the distribution will report the deposit and withdrawal in the usual manner on IRS Form 5498 (to report the contribution) and on IRS Form 1099-R (to report the distribution).  Taxpayers will be instructed how to report these withdrawals as tax-free distributions on their 2008 Form 1040.