Tax preparation time can be stressful for people who hold their breath until they find out the damage or the good news when the final figures are in. If the news is good–the government owes them back some of their money–those who want those funds as soon as possible may request a tax refund advance.
Annually, a friend of mine goes to H&R Block for preparation of his state and federal returns. The taxes withheld each payday from his paychecks typically exceed his tax liability at the end of the year. When H&R Block calculates taxes, each time they determine that he is entitled to get some money back from the government. They then offer him the option to receive his tax refund immediately through their tax refund advance loan.
What are Tax Refund Advance Loans?
These loans, also known as tax refund anticipation loans, allow you to receive the money you will get back eventually from the government in your tax refund much sooner. This is very tempting–having the money right now, so you can pay urgent bills or buy things you really need sooner rather than later can always be a very inviting proposition. But should you jump at this chance?
There is no free lunch–whether talking about food or a tax refund advance. The tax preparers or payday loan companies incur expenses in connection with issuing these loans, including the value of their money that will not be repaid for days or weeks by the government refund. They want a fee for their services, and the fee charged by some of these places that give tax refund advances can be exorbitant.
You are in effect paying a very large chunk of your own money to someone else, in return for lending you some of your own money. The lenders incur virtually zero risk in return for giving you money you are due anyway.
What should you pay to someone so that they will lend you your own money? If the refund due you is around $1,000, the tax preparer who you have just paid a fee to prepare your returns may entice you to accept a loan to get that money immediately, and then charge you another fee which he assures you will be a modest or “token” additional fee.
This “modest” fee varies among different tax preparing services and loan companies. Sometimes the fee is $30; however, some loan companies charge fees up to $100. They then may tack on “administrative” and electronic bank transfer fees charges. These additional charges can run the total cost of getting your own money to $100 to $200. You are saying farewell to up to 20 percent of your refund, just for the pleasure of getting it a bit sooner.
The time you are saving by getting this up-front tax refund advance is probably only 10 to 14 days if you file electronically. There are few emergencies that cannot wait 14 more days, if you have already waited several months for your return. Even a return sent by mail has a turnaround time of as little as three or four weeks if the return is mailed early in the tax season.
Probably the only real justification for paying so much to get money a little sooner is a genuine, unexpected emergency that cannot wait until the government processes the return and issues the refund.
One way to avoid the issue is to submit a new W4 form to your employer that adjusts your withholding status so that you receive your money as soon as you earn it, rather than waiting until you file your tax return. Otherwise you are giving a free loan of your money to the government!