Tax refund advances are interest-free and fee-free loans of up to $3,500 that major tax preparation businesses, such as H&R Block, give to clients who are expected a return during tax season.
These are not the same as the expensive tax return anticipation loans that were available a few years ago until the FDIC compelled banks to cease providing them.
The main benefit of these new tax refund loans is that taxpayers who are entitled refunds may access them in as little as a few hours rather than having to wait several weeks for the IRS to complete their returns. However, even though some tax preparation firms advertise “free” tax refund loans, there may still be costs and service charges.
- The sooner you file, the sooner you’ll get your return. Don’t wait until the last minute.
- File your return electronically and request a direct transfer of your refund.
- Receive a short-term loan if required, but pay it back in full as soon as you get your return.
How Tax Refund AdvancesWork
Why provide free loans to tax preparation customers? To get them in the door and charge them for more services.
With severe competition both online and in-person, tax preparation businesses must find a method to differentiate themselves and acquire market share.
The loans are not provided by the tax preparation firms themselves, but by banks that partner with them. When a consumer applies for one of these loans, the IRS transfers monies to the financial institution affiliated with the tax preparation firm, which then disburses the funds to the customer. When the taxpayer receives his or her return, the tax preparation firm collects the loan money and remits any residual refund to the consumer.
If the IRS estimates a lesser refund than the tax preparer provides, the borrower will be responsible for the difference, just as with any other loan.
That Free Advance Can Be Costly
Most importantly, since these loans are only accessible to clients who pay to have their returns properly prepared, they are a tool to induce consumers to pay for tax preparation services.
Other services that taxpayers may wind up paying for after they walk through the door include return transfer accounts, which enable consumers to finance tax preparation expenses, and fees linked with prepaid debit cards, which allow users to obtain loans and tax refunds. A person may expect to spend $200 in fees and charges for a $2,000 loan to borrow their own money, according to FINRA.
Alternatives to Tax Refund Loans
While refund loans are free in and of themselves, the tax preparation connected with them may be costly, and the costs may not be disclosed upfront.
Furthermore, depending on how these monies are utilized, some customers may incur large costs when using the prepaid cards on which they are supplied. Taxpayers who wish to save money can look at the following options.
Jan. 24, 2022
This is the deadline for the IRS to receive 2021 tax returns. However, you may finish them early, and your tax preparation program will save them.
Whether you utilize a professional or do your own taxes, the key to receiving your return quickly is to file as soon as possible.
The IRS receives a flood of late-filed returns in the month before the deadline, which is generally April 15. The backup causes processing and reimbursements to be delayed by weeks.
To get your refund as soon as feasible, file as soon as possible. The IRS has said that it will begin receiving and processing 2021 tax returns on January 24, 2022, but if you use a tax preparation service, you may submit your forms ahead of time and they will be kept until that day.
The IRS has stated that 2021 tax returns will be due on April 18, 2022, which is later owing to the District of Columbia’s Emancipation Day holiday on April 15th. Due to the Patriots’ Day holiday in both states, the deadline to file in Maine and Massachusetts is April 19, 2022.
E-File Your Return
Whether you handle your taxes yourself or hire a professional, make sure you file electronically and request direct transfer of your refund to your bank account or a low-fee prepaid card.
If your income in 2021 is $73,000 or less, the IRS Free File program provides free tax preparation services from a variety of professional software publishers.
Officially, you should take 21 days for the return to arrive, although direct deposit reimbursements often come in two weeks or less. Electronic returns are completed far more quickly than paper returns, frequently within 24 hours, and direct deposit deposits funds into your account much quicker than a mailed check.
If you request a check, you must still deposit it in your bank account and wait for it to clear. Checks may also be misplaced or stolen.
Paper-File Your Return and Request Direct Deposit
Even if you send your return, you should ask for direct deposit or a prepaid card deposit.
It may take six to eight weeks to complete your mailed-in return and another three weeks to get your refund. It’s cheap but inconvenient, and it may be too slow for taxpayers who depend on returns to make ends meet.
The IRS Where’s My Return Tool allows you to track the progress of your refund. You’ll need your Social Security number, filing status, and the precise amount of your refund.
Get a Short-Term Loan
If you want funds sooner than these solutions provide, explore borrowing options such as a personal loan or a credit card.
The important thing is that it be a “short-term” loan. If you choose this route, you must commit to repaying the loan in full as soon as your return arrives in your bank account. Personal loans and credit cards have quite high interest rates, and if you pay them off in tiny monthly amounts, you might end yourself in a very deep hole.
In any event, look around to get the most affordable option for your scenario. Paying a high annual percentage rate for a week or two may be less costly than having your taxes properly handled, particularly if you have to pay a charge to borrow the tax preparation price.
Alternatives to Paid Tax Prep Services
Low-income people are eligible for free tax preparation. Among the services offered are:
- All taxpayers with a 2021 individual or family income of $73,000 or less are eligible for the IRS’s Free File Service. (State returns may still be subject to a modest cost.) The IRS free file program allows you to choose tax preparation software from any of eight publishers, including TaxAct, FreeTaxUSA, and 1040Now.
- Taxpayers with incomes of $58,000 or less, taxpayers with impairments, and those who speak limited English may utilize the IRS’s Volunteer Income Tax Assistance (VITA) program. If you qualify, you will get free basic income tax return preparation from an IRS-certified volunteer.
- The IRS’s Tax Counseling for the Elderly program employs IRS-certified volunteers who specialize in pension and retirement tax concerns. There are no age restrictions, however the program is primarily geared at persons aged 60 and above.
If You Go With a Pro
If you do decide to engage with a tax preparation firm, make sure you have a precise estimate of your total bill up front, and don’t allow anybody bully you into paying expenses you can’t afford.
After receiving an estimate, you may want to look into your other alternatives for tax preparation and borrowing money to hold you over until your return comes. You might save a few hundred dollars depending on your tax position.
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