If you’re looking for great advice on financial issues, be sure to bookmark goodwill.org. The site is full of smart info, including this week’s Q & A tackling a tough tax question: Is there a downside to using a quick tax refund service when you’re facing financial strain? Take a look at the question along with Goodwill International’s Jenni Baker‘s reply:
While quick and easy money sounds like a good thing, the truth is that working with these companies often only speeds up your refund process by a short period, and the fees you’re charged can equate to high interest percentages of your total refund amount.
Refund anticipation loans (RALs) were designed to provide tax filers with quicker access to their refunds for a fee. While banks regulated under the federal government are no longer allowed to offer these kinds of loans, payday lenders and other companies not required to adhere to federal regulations may still extend these offers to tax filers.
Fees for these kind of loans can run as high as 24 percent and eat into your refund. A study from the National Consumer Law Center and the Consumer Federation of America found that in 2009, 7.2 million taxpayers participated in RALs, losing a cumulative $606 million in fees.
Additionally, tax preparation companies are still allowed to offer Refund Anticipation Checks (RACs) – short-term loans of the fee they charge for their services. These loans can also be used to defer paying tax preparation fees, which average $143 for a nonitemized return and $246 for an itemized return.
Chi Chi Wu, a staff attorney at the National Consumer Law Center put these offers into perspective for USA TODAY, explaining, “At $30 to defer payment of about $200 for 20 days, you’re talking a triple-digit annual percentage rate.”
Tax Filing Alternatives
First, know that you won’t have to wait forever to get your refund if you file the traditional routes. Most people receive their refunds from the IRS within 21 days, or three weeks. People filing their taxes online and providing direct deposit information often get their refund back even quicker.
It’s also worth knowing that Goodwill Industries International has partnered with the National Disability Institute and United Way Worldwide on MyFreeTaxes, a Walmart Foundation-funded initiative that offers free federal and state tax preparation and filing services online and in person to eligible Americans earning $57,000 or less per year. Visit MyFreeTaxes.com to learn about filing online or to locate free tax help in your area.
Lastly, to maximize your refund, be sure to claim all of your tax credits that you qualify for. If you earn less than $50,270 in 2012, you may be eligible for the Earned Income Tax Credit and can receive up to $5,891 from the IRS.