Rethink that Tax Refund: Rapid or Regular–It Is (or Was) Your Money
Tax time is here. Time of year when we all try to figure out which form to file, what instructions to read, and where are those receipts we were supposed to be keeping throughout the year. Many Americans will be entitled to refunds and, consistent with our “instant gratification” society, they will exercise the option to get their refund sooner rather than later. These quick refunds are often called refund anticipation loans (RALs) or refund anticipation checks (RACs) and though they may put the money in your pocket sooner will you really be in a better position? Let’s examine..
An early tax refund is nothing more than a short-term cash advance against your expected income tax refund. The major downside of the RAL is that many entities providing RALs charged high rates of interest . This interest varied in amount based on the amount of the RAL. Some interest rates were 100%, 200%, and beyond….yikes! Is it really worth paying that amount of interest just to have your money earlier? With the interest you will pay on your income tax refund via the RAL you are taking money out of your pocket.
The federal government largely has outlawed RALs and they have been replaced by a somewhat similar product: Refund Anticipation Check (RACs). A RAC is a temporary bank account into which the IRS direct deposits a refund check. Consumers access that money through a check or prepaid card. When the money is gone, the account closes automatically. Presumably RACs have lower interest rates and fees than existed with RALs but they should still prompt careful consideration by consumers. Just like you should do before you buy a car or before you sign a contract, do your research before agreeing to a RAC. You should also click here for further information and perspective on the advisability of a RAL. And here is information on the current product being offered to taxpayers: the RAC. Finally, review alternatives to taking a RAL or RAC.
The IRS website says the following regarding the delivery of refunds to eligible taxpayers who e-file:
“You can generally expect the IRS to issue your refund in less than 21 calendar days after we receive your tax return”
I realize the word “generally” in the above sentence leaves some wiggle room for the IRS and it may be longer than the projected three weeks before you receive your refund. You can track the delivery of your refund at the IRS website. Therein lies the decision for the taxpayer: (1) exercising some patience and planning beforehand to receive all of the refund or (2) paying the proverbial piper (i.e. paying the interest) and getting your refund–but not 100% of it–now via a RAC. If you really need the money as soon as possible and are willing to then be sure to read the terms of any RAC agreement you may sign. Be sure to get answers to the following questions:
- What is the interest rate?
- What fees are you being charged?
- What happens if your tax refund is less than you thought it would be?
Whichever method you choose for your income tax refund, best wishes and make good use of that money. It’s your money!
NOTE: None of the information contained in this post is to serve as tax advice or should be construed to be tax advice. For advice on taxes, refunds, and similar financial and accounting matters consult a tax professional.