Tax-refund loan alternatives
Taxpayers got the bad news just days before the 2015 tax-filing season started on Jan. 20. Budget cuts mean that overburdened employees won't be able to issue tax refunds as quickly. Some refund checks, particularly those issued in connection with returns submitted on paper instead of filed electronically, could be delayed for a week or more, according to IRS Commissioner John Koskinen.
Some taxpayers, upset at the delay, might consider offers to get their refund money sooner via private programs. In recent years, attorneys general have filed suits against refund anticipation loan, or RAL, operations for failure to disclose full costs of the products to consumers. Consequently, RALs are effectively unavailable. But alternatives, such as refund anticipation checks, remain and, say consumer advocates, can be just as costly.
If instant cash is more a desire than a need when considering a quick refund, consider these alternatives.
Go electronic. Abandon the traditional paper return sent via the U.S. mail and file from your computer. You'll get the money almost as fast as you would with a refund anticipation loan and get it without paying any loan fees or interest. In fact, you may not need to pay for anything. An IRS partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. For the 2015 filing season, the Free File program is available to individuals with adjusted gross income of $60,000 or less.
The IRS has also expanded the online program to include taxpayers who make more money. Via the Free File Fillable Tax Form option, anyone, regardless of income, can enter their tax data onto online forms and then file them for free directly with the IRS. This is not a tax software program, but simply blank forms you can use via computer, and file directly, rather than filling them out by hand.
The IRS says that any e-filing option you use will get you your tax refund much more quickly than mailing a paper return. Whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1 percent for electronic filers.
Direct deposit. Electronic filers who opt for a refund via direct deposit do even better. The IRS says it expects to issue more than nine out of 10 refunds within 21 days, but the fastest way to get a refund is to e-file and choose direct deposit. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it's added protection against lost or stolen refund checks sent via the mail.
Use store financing. If you want your refund to finance a must-have new appliance, store interest rates usually will be better than a refund anticipation loan. Many stores offer free financing for limited time periods. By then, the refund should have arrived and you can use it to pay off the store credit -- and pay no interest at all.
Impatience usually wins. Some taxpayers depend on their annual refunds to cover necessary living expenses or help cover education costs. Others, however, look at the annual IRS check as a way to indulge themselves.
Whether the tax money is for needs or wants, financial and tax professionals usually advise patience.
"Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax anticipation loans has become obsolete," says John L. Stancil, CPA and professor emeritus of accounting and tax at Florida Southern College in Lakeland.
But ultimately, a refund anticipation product is a personal preference, not a fiscal issue, for taxpayers. The prospect of cash a few days earlier appeals to those who value speed over cost, such as the person who stands impatiently in front of the microwave complaining that it's taking too long for dinner to be ready.
Companies that offer quick refund options are well aware of such impatience, and that's why some opportunities survive even as electronic filing increases, especially in the past two years when official filing was delayed.
But if you can squelch your refund appetite for just a few days, then you -- and your bank account -- will be better off.