Refund Anticipation Loans
Looking forward to a tax refund this year? If you pay a service to prepare your tax return for you, beware of Refund Anticipation Loans (RALs). With a RAL, you can get your money faster (generally, there is a higher fee for an immediate refund, or a lower fee if you can wait a couple days). But fees and interest make RALs a very expensive option.
Getting the money faster is only part of the appeal. Many people consider a tax refund to be somehow different from the rest of the money in their family budget. A tax refund is for fun, or a special purchase, or to repair or replace the family car, not for routine, mundane expenses. Since fees and interest come out of the tax refund, it is easier to rationalize or just ignore the high cost.
Back when all tax returns and refund checks were mailed, it took six to eight weeks for the Internal Revenue Service to process the return and mail out a paper refund check. RALs came about as a way to receive the money in days rather than weeks. However, RALs have never been a good idea due to their high cost. With e-filing, direct deposit, and other fast turn-around options available, they are an especially bad idea today.
Electronic filing is now widely available and used routinely for more than sixty percent of all returns filed. Use the direct deposit option with electronic filing and your tax refund will be deposited into your checking or savings account in seven to ten days. If you like, you can even split your refund between up to three different accounts. This is a great way to get into the savings habit, and build up emergency savings when you receive a refund.
Saving part of your tax refund is a good way to prepare for future unexpected events. Save at least half of it for irregular household expenses, emergencies, and/or future financial goals. The IRS makes saving easy. Simply file Form 8888 with your tax return. This form allows you to direct deposit your tax refund into up to three different accounts.
The IRS certifies volunteers throughout the state to provide free tax assistance to low- and moderate-income households through the Volunteer Income Tax Assistance Program (VITA). AARP also offers free tax assistance through the Tax Counseling for the Elderly (TCE) program. Call the IRS at 1-800-829-1040 to find out about a VITA or TCE site near you.
In summary, RALs are usually a bad idea. Avoid these high-cost loans so you receive all of your refund. If you qualify, take advantage of free filing assistance to save even more. Every dollar counts.
