Monday, February 6, 2017

Rapid Refund Ripoffs

Back in the early nineties, I took a tax preparation course and then worked a season as an income tax preparer for a major tax preparation firm. As soon as the W-2s were distributed, customers stormed our doors, anxious to file their tax returns and take advantage of their "Rapid Refund."

These poor souls paid tax preparation fees, processing fees, and interest in excess of 60% for the privilege of receiving their own money within a few days instead of waiting a couple of weeks for the IRS to process their returns and issue their refunds. Because the fees and interest were deducted from the anticipated tax refund, they didn't think about what this expedited service was costing them.

In addition to a full or partial refund of withholding, many of these taxpayers were eligible for the earned income credit, a government subsidy available to low-income workers with dependent children. Workers in this income category were least able to afford exorbitant convenience charges, siphoning away money that could have been better used to pay a utility bill or buy groceries.

Since the nineties, there has been a lot of criticism of these "rapid refunds" or, more accurately, "refund anticipation loans," which have been compared to usurious pay-day loans. Increased regulations now require tax preparation firms to be more transparent when disclosing the true costs of this loan product. Nevertheless, every year about this time I see ads for "Express Refund" and "Refund Advance" so customers must still be biting.

It's a choice. Everyone's situation is different.

But there are ways you can avoid unnecessary expenses and keep more of your hard-earned money in your pocket.

First of all, if your 2016 adjusted gross income was less than $64,000, you are eligible to file your return electronically with the IRS at no charge. Eliminate the middle man. The software is easy to use, but if you need help, the AARP and other organizations offer free tax preparation assistance. Check your local library for available services. Even if you don't meet the income eligibility requirements for free electronic filing with the IRS, you can still take advantage of free tax assistance from various volunteer groups if you plan to prepare your own return.

You'll find tax preparation fees at a professional firm much more reasonable if you opt for normal delivery and don't tack on the refund anticipation loan. It might seem painful to pay your preparation fee up front rather than have it deducted from your refund, but when you do receive your refund, it will be much larger. You've been managing all year without that money; surely you can hold on a few weeks longer.

And finally, if you're used to receiving big tax refunds every year, you are overpaying Uncle Sam. Instead of struggling to make ends meet each month, you could have extra funds in your pocket all along, simply by completing a new W-4 form with your employer to decrease the amount of tax withheld each pay period. Even if you live within your net income and look forward to a big refund each spring as a splurge, you'd be better off setting the extra money aside—perhaps via automatic transfer to a savings or investment account—on a regular basis. Why give the government an interest-free loan when you could be earning interest on the money?

What tips do you have for saving on tax preparation and filing? I'd love to hear your comments.

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