Knowing that you have money can make it difficult to be patient. When you imagine all the ways you can use this pending receipt, ask yourself how you can get it earlier.
If you File your taxesThere is a tool you can use to get your refund earlier: it's called a tax prepayment. It is effectively a loan against your expected refund.
Many companies offer them because they have a relatively low risk compared to other loans. The lender sees your expected refund as calculated by a tax advisor and knows that the government always pays the money it owes.
While these loans offer a way to get what you want faster, you should be aware that not everything that glitters is gold. These products are often costly.
How does a tax prepayment work?
Prepayments for tax refunds provide almost instant cash access as you wait for tax refund. They are effectively a short-term loan for your future tax refund and provide liquidity until the IRS decides to file your tax return.
After reviewing your tax return and determining your expected reimbursement, a lender will create a loan that will usually match the amount you want and your expected reimbursement. Then they extend this credit until the IRS issues your refund. At that point, the lender will request the amount to meet the outstanding loan. The rest of the refund will be transferred to you.
The most commonly used tax preparation companies offering advance tax loans this year include H&R Block, Jackson Hewitt, Liberty Tax, and TurboTax.
Amounts available vary from company to company, but can reach up to $ 6,400. The lowest available loans are $ 200. These lower amounts are usually not subject to interest or fees. They are designed to tempt you to prepare your taxes with one of these companies.
Some companies offer very low loan amounts before the end of the tax year with sufficient documentation from the current year to support the need for an early repayment loan. For example, you can get up to $ 500 at Jackson Hewitt before your W-2 arrives, provided you can show valid proof of income, such as: B. a wage adjustment.
Advantages and disadvantages of a tax refund advance
Read more below about the pros and cons of these financial products to determine if they make sense for your financial needs.
Here are some advantages of a tax refund in advance.
Quick access to your money
If you are in a difficult situation, it can be helpful to have access to your money at all times. Instead of waiting three to four weeks for your refund by direct deposit or a check in the mail, you can instantly receive money using various payment methods such as branded debit cards. The loan will then be repaid once your reimbursement is in your possession.
Some refund advances are really free
In this case, one of these products can be useful. Be sure to read the fine print to make sure it's really free and to find out how to get the funds.
No impact on the credit
Applying for an advance loan does not affect yours Credit score,
Tax advances have several disadvantages. Here are a few to consider.
Funds are often transferred to branded debit cards
Some lenders require funds to be transferred to branded debit cards, which in some cases limits your ability to use the funds.
Usual transfer fees for debit cards, e.g. Withdrawal fees for ATMs continue to apply as for any debit card used with a non-member bank.
For example, if you use TurboTax to request an advance credit for the refund where the credit proceeds are on a branded debit card for an amount less than your refund, the remaining refund will be transferred to the branded credit card after the refund has been processed. Note how your entire refund affects you.
Alternatively, you can often have the loan transferred to your bank account, although this service may incur additional fees.
There is no point in making savings
As a rule, you will receive part of your refund owed within 24 to 48 hours after requesting a tax prepayment. But the IRS quickly processes tax returns. A qualified reimbursement is usually made within a few weeks of submission.
If you have a financial cushion that will last until the refund is received, there is little point in lending this money.
True costs are often higher than they appear
While fees and interest expenses may appear small in relation to the amount of the loan, their actual costs may be comparable to or exceed credit card financing.
For example, with Jackson Hewitt's Go Big Refund Advance you can borrow up to $ 6,400 and charge 2% on the amount you borrowed. (Jackson Hewitt also offers advance loans with a prepayment penalty of $ 200 to $ 500 and royalty-free advance loans with a prepayment penalty of $ 200 to $ 3,200 without fees.)
If you applied for a $ 2,500 loan under the Go Big Refund Advance program and paid a 2% fee, you would actually repay the $ 2,550 loan.
In fact, all of these fees represent the 2% fee and correspond to an APR of 29.2%, provided the average rental period is 25 days.
The frequently stated interest is assessed monthly. Interest rates of 3% to 5% are often announced. However, this results in an annual interest rate of 36% to 60% on an annual basis.
Should you get an advance tax loan?
While these loans are useful tools for providing liquidity, they can often be excessive. However, it doesn't cost you everything. Sometimes they even offer a more convenient way to use the money – although access is limited because it is through a debit card.
If you plan for your cash flow needs, you may see a tax refund as a self-induced bonus on your income as you get a decent check from the IRS. However, if you see it differently, you are under pressure all year round because you offer the federal government interest-free financing. The money you get back from the IRS is the money you overpaid during the tax year.
Instead of seeking a tax refund every year, it would be a better planning method to adjust your withholding tax rate so that the amount you pay from each paycheck is kept to a minimum. You will receive the money that you would otherwise have received as a refund once you have been paid.
Riley Adams is a CPA who is originally from New Orleans and works as a senior financial analyst at Google in the San Francisco Bay Area. He also runs the personal finance website Young and investedthat supports young professionals in discovering financial independence and entrepreneurship.
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