If you have a refund coming from the Internal Revenue Service (IRS) this year, chances are you want to get your hands on it as soon as possible. However, think long and hard before you apply for a Refund Anticipation Loan.
These loans are supposed to put money in your pockets faster than waiting for your refund to arrive, but increasingly the high costs of these "loans" and the faster response time using the IRS's e-filing makes RALs a very bad idea. The Center for Responsible Lending lists five reasons you should avoid them:
1. Triple-Digit Interest Rates
The annual interest rate for the typical "instant refund" can range from 40 percent to 700 percent, depending on how long it takes the IRS to process the paperwork and issue the refund.
2. Not-So-Fast Service
In most cases, a tax refund loan only speeds up the process for a few weeks or less and with recent technological improvements in the IRS, the benefit may even be reduced to just a few days if a taxpayer files electronically.
3. Pickpocketing Fees
Even if you manage to avoid the posted triple-digit interest rates, many refund anticipation loans carry additional "administrative" fees designed to steal away more of your own hard-earned money.
4. Unexpected Refund Changes
If for any reason the amount of the anticipated refund changes or is denied by the IRS, the Quick Cash Refund quickly turns into Long-Term Debt as the taxpayer must unexpectedly paid the difference or fear a debt collector.
5. It's Your Money, Keep It!
In this economy, every little penny counts. American taxpayers work too hard throughout the year to give up such a huge chunk of their refund. Instead of using a Refund Anticipation Loan, open a checking account; file your taxes electronically; wait for the direct deposit; and keep more of your money!
Do it yourself
If you have a computer, and Internet connection, and earned $57,000 or less last year, there's no reason you can't file your own taxes online, using the IRS' Free File program. Just go to www.irs.gov/freefile, choose a software provider and follow the step-by-step directions.
Your return will be filed electronically, meaning the IRS will get it instantly. If you're getting a refund, you could get it in fewer than 10 days. Best of all, it's free.
If you're a senior citizen and qualify income-wise, you may qualify for free tax preparation help. AARP provides tax help for seniors at over 7,000 locations nationwide. You can find one near you online at aarp.org or by calling 888-227-7669.
You may also purchase tax preparation software, which usually costs less than what you would pay a tax preparer. Make sure you are buying the latest version of the software, however, and that it contains tax forms for your state, if you want to use it to file your state return as well.
Of course, some people will want to pay a professional to prepare their returns, especially if you are claiming a number of deductions. Your choices are the franchised storefront firms like H&R Block and Jackson Hewitt, and independent CPAs or tax preparers doing business in your community.
Before selecting a tax preparer, ask people you trust for recommendations about a good, reliable firm in your community. Don't assume that a franchise operation will have lower fees than an independent. Any tax preparer should be able to give you an estimate of fees before beginning work.
