The high cost of tax refund loans

It’s tax time and that means payday for many American workers expecting a tax refund. After a tough economic year, many cash-strapped taxpayers may be feeling a bit desperate and don’t want to wait longer than necessary to get their money. Unfortunately, this could drive consumers struggling to make ends meet to seek a refund anticipation loan.

Basically, a refund anticipation loan is a short-term cash advance that uses your expected tax refund as collateral. The loans allow you get your money a little bit earlier, but at a hefty price. According to consumer advocates, refund anticipation loans fees translate into high Annual Percentage Rates (APRs) of 50% to 500%.

Low- to moderate-income taxpayers are usually the target of tax refund anticipation loans. These consumers end up paying a total of more than $900 million in fees for their easy money. Although the IRS does not take an official stand on refund anticipation loans, it also does not endorse the practice. Unless someone is facing a true financial emergency, the fees are just not worth the convenience. Instead, taxpayers should consider taking steps to ensure they receive the maximum amount owed to them:

  • Double-check your work. According to the IRS, even a small mistake can cause problems with your tax return, which might lead to delays in processing your return and receiving your refund.
  • Use Free File. A new service offered by the IRS, which enables low and middle income taxpayers to file electronically for free and have their refund deposited directly in their checking or savings accounts in about 10 business days.
  • Take tax credits. The IRS announced several new benefits this year like the Recovery Rebate Credit and the First-Time Homebuyer Credit – offering a tax credit up to $7,500. Visit IRS.gov to learn more about other tax credits and benefits.
  • Remember your charitable donations. The IRS might just be the only group that will give you extra credit just for being nice. The value of all donated items including clothes, furniture, and cash is deductible. Proof of the donation is required.

Finally, if you are anticipating a tax refund for more than $500, consider reducing the withholding on your W-4. Calculators at IRS.gov can help you figure your appropriate amount. More money on your paycheck will help during this time of economic recovery.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

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