Before Using Instant Tax Refund
Instead of waiting for tax refunds from the Internal Revenue
Service, millions of consumers borrow against part of all of their expected tax
refunds. These refund loans are heavily marketed by paid tax preparers and
immediately put cash into the consumer's hands, making it seem to be a quick and
"painless" way to get cash. However, the quick cash comes at a price.
Taxpayers who accept these loans end up paying fees ranging
from an annual percentage rate (APR) of 67% to as high as 774% for immediate
cash, according to a Consumer Federation of America national survey.
Adding to the high rate are tax preparation fees averaging about $100 and
electronic filing fees of around $40.
In other words, consumers are paying $129 to $429 to have
their taxes prepared and receive an instant refund. Further, if the tax payer is
not entitled to the amount of refund claimed, he or she will owe the lending
agency the difference, plus interest.
Alternatively, electronic filing without a loan cuts the wait
to about 10 days if the consumer has a bank account into which the refund can be
direct deposited by the U.S. department of Treasury. This saves much unnecessary
expense.
When electronically filing taxes with the IRS, if you are
eligible for a refund, you may choose to have your refund directly deposited
into a checking or savings account, to receive a paper check, or to apply the
refund to your estimated tax payments for the next filing year. If you owe, you
can make a payment (by April 15th) by authorizing an electronic withdrawal from
a checking or savings account, paying by credit card (Discover, American
Express, MasterCard or VISA), or by paying by check or money order using
Form 1040-V, Payment Voucher.
There are better alternatives for getting help with tax
preparation. At Volunteer Income Tax Assistance (VITA) site through the state of
Virginia, IRS-trained volunteers will prepare your taxes free of charge, any
many will file them electronically for free, as well. They will prepare basic
tax returns, including Forms 1040, 1040A, 1040EZ, and Schedules A and B, for
individuals earning $34,000 and under. This service is convenient to you; there
are fewer errors with electronic filing; refunds are fast; and Federal and state
returns can be filed electronically at the same time. To find the VITA site
closest to you, contact the IRS at (800) TAX-1040 or (800) 829-1040. Another
alternative is the AARP, whose volunteers help seniors with tax preparation. For
information on how to have your tax refund deposited to your VBSFCU account call
463-3650 ext 309.
The best thing to do is wait until you actually receive the
money. If you absolutely can't wait, better
alternatives for borrowing money include:
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Family for Friends - If they have the means, a loan from family
of friends might be a good option. It's wise not to borrow more then your refund
check will cover or to promise to pay more than you can afford.
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Credit Union - The next best place to get a loan is a credit
union. Members can borrow at a medium level rate, since they usually are able to
withdrawal payments directly from your paycheck each pay period.
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Bank- You might also want to check with a local bank to see if
they will make loans for small amounts. If you have a good credit rating, and
they make small loans, this might also be a good source, since bank rates are
competitive with those of credit unions.
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Cash Advance on a Credit Card- If you have a credit card, you can
borrow money, in the form of a cash advance. (These are usually a much higher
rate then the rate you pay for most purchases).
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Small Loan Company - These firms usually ask for collateral and
charge between 24-36% rates of interest.
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Sources of Information:
Instant loan segment adapted from "Would You Pay 500% for
'Instant Refunds?'" by Jean Ann Fox, Consumer Federation of America, 2002.
Portions on VITA program taken directly from IRS website:
http://www.irs.gov/taxtopics/tc101.html
Written by Robert H. Flashman, PH.D., Professor and State
Specialist in Family Resource Management, University of Kentucky Cooperative
Extension Service and Celia Ray Hayhoe, Ph.D., CFP, Assistant Professor and
State Specialist in Family Resource Management, Virginia Cooperative Extension.
