Avoid Refund Anticipation Loans This Tax Season

[Jan 29, 2010.]

 

Many taxpayers are receiving W-2 forms and other tax documents in the mail. While some are dreading having to prepare their annual tax return, others are looking forward to getting a big, fat refund--especially if they are unemployed or experiencing financial hardship.

Anyone looking forward to getting an income tax refund this year may be tempted to use one of those rapid refund services to get their money more quickly. If you are in this situation, you are better off skipping refund anticipation loans and just waiting for your money.

Loans Prey on Low-Income People

Many of those who rely on refund anticipation loans have low or moderate incomes. They are socked with fees to receive personal loans to tide them over until they receive their tax refunds. The typical cost of one of these loans is around $250, according to the Wisconsin Department of Revenue. More than 8 million U.S. taxpayers lost about $800 million from their refunds last year because of these loans, according to Consumer Affairs.

Skip Personal Loan and File Electronically

Most taxpayers receive their refunds in two weeks or less. For most people, filing electronically and having refunds direct deposited into a bank account speeds up the amount of time it takes to receive a tax refund. It doesn't make sense to pay a fee for a loan or for a refund anticipation check when a refund can be direct deposited into a bank account in such a short amount of time.

More Fees for Refunds

Refund anticipation checks, which usually cost about $30, should also be avoided. About 12 million taxpayers paid about $336 million in fees to receive refund anticipation checks last year.

If you don't have a bank account, you should open one before filing your taxes. There are many free or low-cost bank accounts that don't require a minimum balance. In many communities, free tax help is available from various agencies. Volunteers can help prepare and file your returns electronically.

Change Tax Withholding

Finally, it's important to note that any taxpayer who is receiving a huge tax refund may have too much of their income withheld from each paycheck. You can change your withholding by completing a new W-4 form, which is available from the Internal Revenue Service (IRS).

Anyone who receives a large tax refund has basically given the federal government an interest-free loan during that tax year. Changing withholding allows you to keep more of your income throughout the year. The IRS has a calculator to help you figure out how much of your paychecks to have withheld.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.