Need Cash ASAP? Slow Down and Think Before Getting a Tax Refund Advance
Some might find it hard to resist the charms of Mad Menstar Jon Hamm, and lately that might include offers outside his area of expertise as an accomplished actor.
Hamm has been appearing in television commercials for a tax preparation company where part of his pitch is to urge taxpayers to sign up for advances on their tax refunds.
In fact, several tax preparation companies this year are making comparable pitches. Their message: Allow us to do your taxes, and in exchange, we can give you an advance on your expected tax refund.
For some Americans, their tax refund is the largest annual check they'll receive. For those who need cash to pay bills or meet other obligations, getting money sooner rather than later can sound especially appealing.
Image source: Getty Images.
This year in particular, taxpayers might be looking for ways to accelerate their refunds, given the implementation of a new law that aims to prevent fraud by requiring the IRS to hold refunds until at least mid-February for people claiming the Earned Income Tax Credit or the Additional Child Tax Credit.
But before you say yes to a tax-refund advance, it's important to learn more about how such advances work and to consider whether or not they are right for you.
How does it work?
Depending upon the tax preparation company, different offers and rules may apply.
Generally speaking, though, taxpayers must have their taxes prepared by the tax preparation company at a participating office to be eligible. In addition, the IRS must owe you a refund.
Other eligibility and underwriting criteria may be set by the individual tax preparation company.
Advances come in various increments, with some companies offering up to $1,300 per return, with advances generally issued within days of the IRS' acceptance of your return.
When your actual refund arrives from the IRS, the amount of your advance -- plus any fees involved with preparing your return -- will be deducted from what you receive.
How are these advances different from refund anticipation loans?
Tax preparers used to charge high interest and fees when offering refund anticipation loans. When loans couldn't be repaid because expected refunds were lower than expected, consumers were held liable for repayment. That could be a problem for those who didn't have the cash on hand.
Federal regulators started to clamp down on the banks offering refund anticipation loans, and by 2012 most banks pulled out of the refund anticipation loan business, according to a 2016 report by the National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA).
Today's refund advances are still technically loans, but they are different from the refund anticipation loans of the past in that they don't charge fees or interest. If the amount you receive in the advance exceeds your actual refund, tax preparers have said they will not seek to collect the difference.
What are some of the potential downsides?
While the deal sounds very appealing, there are strings attached. Remember, in order to be eligible for a refund advance, you must have your return prepared by a tax preparation company, which can sometimes cost hundreds of dollars.
"Tax preparation is one of the few consumer services in the United States for which consumers cannot obtain a price for the services before they incur them. Tax preparers assert that they charge by the form, and cannot predict which forms will be generated until they actually finish the tax preparation," the NCLC and the CFA wrote in their report. "Thus, consumers cannot comparison shop, or predict how much tax preparation will cost them."
Certain taxpayers, especially those of modest means, might have very simple tax returns that don't require professional services. In that case, a tax payer may end up paying for a service he or she doesn't need in order to gain quicker access to a refund.
"I would encourage tax filers to ask themselves, are they picking the tax preparation service based on their skills, or based on the fact that they are offering an advance," said Adam Rust, director of research at Reinvestment Partners, a nonprofit advocacy group focused on low-income consumers.
In addition, tax preparers might try to sell consumers additional products, such as an audit protection service, and the fees can add up. If you were looking for fast cash to pay bills in the first place, it's especially important to be careful about how you spend your money.
What can I do to speed up my refund?
In general, the best and fastest way to get your tax refund is to have it electronically deposited for free into your account through the IRS' direct deposit program. You can track your refund using the IRS' "Where's My Refund?" tool.
How can I avoid a situation in the future where I would need a tax refund advance?
Tax time is a good time to think about your finances and plan for the future.
You might want to consider changing your tax withholding to reduce the chance that you'll get a refund. A refund sounds great, but in reality it means you overpaid on your taxes over the course of the year. A tax refund is often referred to as an "interest-free loan" to Uncle Sam. It is money you paid to the government, which you might otherwise have used during the year to pay your bills, invest, or reduce your debt.
Setting aside money in a safe place (like a savings account) for expenses, both anticipated and unexpected, is a smart habit. It also means you don't have to depend on a tax refund or advance.
If you do get a refund, consider using it to start an emergency fund or use some of the money to add to your retirement nest egg. If you use the IRS' direct deposit, you can split your refund into up to three accounts. Consider putting some money into your checking account and the rest into savings.
In short, make the most of any refund you do get.
"Set aside even a little bit of money," Rust said. "Think of this time as a chance to improve your financial situation."
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