Fine print, Living with credit

I like anticipating my tax refund every year, but tax refund loans or ‘checks’ aren’t for me

Connie Prater

Cha-ching. I got my 2011 tax refund the other day.

I was happy with how smoothly everything went. I filed electronically using one of the tax preparation software programs available online and the refund was deposited directly into my checking account.

Some tax experts frown on refunds — saying it’s an indication that you had too much withheld during the year. Others point out that Uncle Sam had use of my money during the year that I might have needed to pay bills. Actually, I like getting refunds. They come around springtime and usually help pay for Spring Break or summer travel or car repairs.

This year, my tax refund will pay for surgery for my 7-year-old Jack Russell terrier. She ruptured a ligament in her knee (yes, dogs can get the same kind of ACL injuries that athletes experience) and my refund basically went to the vet. I paid the bill with my rewards credit card and the assistant at the vet’s office noted: “Well, at least you’re racking up rewards points.” That was the silver lining on an otherwise gloomy experience.

Refund anticipation
As my dog recuperated from the surgery (she’s doing great, by the way), the Consumer Federation of America and the National Consumer Law Center were issuing the latest report on those refund anticipation loans offered by tax preparers. These are bank loans that allow taxpayers to receive part of the proceeds of their tax refunds as soon as they file their tax returns. The loans typically last about 7 to 14 days — or until the IRS sends the refund. The lender takes a cut of the refund for interest and fees.

RALs — as they are called — carry hefty fees for filers. This is the last year that federal regulators will allow banks to issues these types of loans. One by one, the different federal regulators overseeing national and local banks have forced lenders to stop offering the tax loans. The Federal Deposit Insurance Corp has told the last of the banks still dealing in RALs to stop doing so after this tax season.

“It’s good riddance to RALs as big business,” says Chi Chi Wu, a staff attorney for the consumer law group.  According to her report, RALs drained the refunds of about 5 million taxpayers in 2010. Loan fees assessed to borrowers totaled $338 million and some 14.6 million taxpayers spent another $438 million purchasing related financial products.

RALs are heavily marketed to low-income families, especially those receiving the Earned Income Tax Credits, a federal program that provides money to low-wage earning taxpayers.

Getting around the federal regulations
Knowing how credit card companies have revamped their terms and fees to get around some of the restrictions of the Credit CARD Act of 2009, it didn’t surprise me that tax preparers are finding ways around the crackdown on RALs. According to a CBS Money Watch report, RALs have morphed into RACs — refund anticipation checks. Instead of offering loans and charging interest on money given to taxpayers in anticipation of getting their IRS refunds, H&R Block is offering checks for expedited receipt of the refund. The tax preparer sends customers an electronic check — that has been reduced by the tax preparation fee and a $34.95 check fee.

Keep in mind that the IRS sends refunds within 7 to 14 days of filing, so the customer is only shaving about a week off of the time it would normally take to get the regular IRS check.

Wait for it … Refund will be worth more
I’ve never been tempted to get a refund anticipation loan and I’m definitely not interested in paying $34.95 to get my refund a week early. I’ve never been in a situation where I needed cash that quickly and couldn’t get the money from elsewhere — such as my rainy day savings fund. But I know many Americans are struggling day to day. They may feel a RAL is their only option.

If I were advising a friend or relative, I would say it’s worth it to wait for the refund and anticipate getting the full benefit of the IRS check — without a lender taking a cut of the money off the top or the bottom.

See related: Refund anticipation loans coming to an end, Don’t take the refund anticipation loan bait, Credit cards and your taxes

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