Typically, it takes up to 21 days for the IRS to issue a refund. If you are unwilling to wait that long, you can request to receive your refund in advance. But a refund-advance may carry hidden fees and/or interest. Before you choose to get a tax refund advance, consider the costs involved.
Unless you need your refund quickly due to a financial crisis, it’s better to wait for the IRS to send you the check. Typically, the time the IRS takes to issue you a refund does not stretch to the full 21 days, as the IRS is now particularly fast in processing returns. If you really need to take a tax refund advance, arm yourself with these tips shared by U.S. News and avoid paying more:
“A tax refund advance is a loan. It can be easy to forget that you’ll go into debt with a tax refund advance. ‘(It’s) actually a loan from a bank, but it’s offered through tax prep services,’ says Davey Quinn, senior vice president of investment management for the online advisory firm United Income.
Companies such as TurboTax and H&R Block offer tax refund advances that work seamlessly with their tax preparation services. The refund from the IRS goes to the preparer automatically to pay back the loan. Advances from these firms and other major tax preparation services often have minimal costs, though refund advances may be capped. For instance, Jackson Hewitt will approve no fee advances up to $3,500. Meanwhile, the maximum advance at TurboTax is $1,000 and is limited to those who expect a refund of at least $4,000. Depending on the company, refund advances may be issued on the same day they are approved, or taxpayers may have to wait for the IRS to accept their return, a process that can take up to 48 hours.
Other companies offer refund anticipation loans that aren’t linked to tax preparation services. These loans may charge annual interest rates of more than 700 percent and require borrowers to make installment payments on the loan amount. ‘It’s a very expensive way to get your money,’ says Michael Solt, dean of the College of Business Administration at California State University—Long Beach, which provides free tax preparation as part of the IRS’ Volunteer Income Tax Assistance program.
Your credit may be pulled. Since a tax refund advance is a loan, most services will perform some sort of credit review. This may be a soft inquiry that doesn’t affect a credit score. However, other lenders may use a hard inquiry, which can negatively impact your credit score. Before completing a tax refund advance request, understand how the lender will review your creditworthiness and whether it could bring down your credit score.
There are costs associated with a refund advance. In most cases, there are no loan origination fees for tax refund advances, but that doesn’t mean they won’t cost you anything. Tax preparation firms will only extend advances to those who use their services, which could cost a hundred dollars or more, depending on the complexity of your tax return.
‘It might be some service you don‘t even need,’ Quinn says. Low-to moderate-income taxpayers can obtain free tax preparation through the Volunteer Income Tax Assistance program. What’s more, many households who have only W-2 income and limited deductions may find it easiest to prepare their own returns.
Another cost associated with tax refund advances is the price of accessing funds. ‘Frequently, they are putting the loan on a (prepaid) card, and there are fees for transactions,’ Joseph says. These may include ATM fees to withdraw cash from the card or monthly fees if the refund is not used immediately. For example, H&R Block applies ATM surcharges for its Emerald Card that range from $1.50 to $3.00, while the prepaid card supplied by the tax prep company TaxSlayer comes with a $7.95 monthly fee.
You could owe interest. Most tax preparation services don’t charge interest for their tax refund advances, but there are exceptions. For instance, Jackson Hewitt offers No Fee Advance Loans of up to $3,500 that don’t charge any interest. However, the company’s Go Big Refund Advance Loans have an APR of 35.9 percent for loan amounts up to $7,000. Interest rates can be even higher for refund anticipation loans through services that don’t offer tax preparation.”
Even though tax refund advance is promoted as a no hidden fee or interest vehicle by many companies, it’s not something that you should use in normal circumstances. With the loan processing time, you receive your refund advance in only about 10 days or less before your scheduled refund time. A week’s wait is better than to get into something that can cost you more in the long run.