I hope everyone had a great Thanksgiving and are rested up for the holiday season. I'm still in rehab from the broken hip and have been watching more TV than I usually do. As a result, I've seen several ads for tax refund advances. Yes, tax refunds already!
The tax refund advances began a few years ago. Companies which offer these programs take basic income from current pay stubs and household information and estimate what your 2013 refund will be. Based on that information, they decide how much money they will advance. Money is dispensed in a check or loaded on to a debit card. Sounds easy! But you need to be very careful and understand exactly what you are doing.
The first thing to understand is that these tax refund advances are loans. Besides your tax information, they may also look at your credit rating to make the loan decision. You want to make sure you understand what fees the company is charging. There will be a loan rate but it may be a flat dollar amount instead of a percentage rate. There may also be an additional application fee if the company offering the advance is a middleman for the company actually loaning the money.
Next thing to make sure you know is how and when you have to repay the advance. Most tax refund advances are not tied to your actual refund. The estimated refund simply represents a future source of income. You could find that your repayment is due before your taxes are filed.
Which brings us to a common misconception, when you get a holiday advance of your tax return refund you are not filing your tax returns. This year, tax returns can't be filed until late January or when you have all you W-2s and 1099s. Whichever is later. You still need to file a tax return to get your refund. This is a factor you need to watch very carefully. What is the company's procedure for filing the return? Do they require that you file the return through them or can you use anyone you choose or do it yourself? Is there an extra charge for the return preparation or was that included with the fees for the advance? How will you receive the remaining refund? It's best to think of refund advances and filing your return as two separate actions; you apply for a short term loan for holiday spending and you file your tax return. The refund may or may not have been issued by the time the loan is due.
While most tax refund advance companies operate legally (although most charge high fees for their services), there have been companies which have taken advantage of their clients. It's up to you to understand what you are buying and have it in writing. If they file your tax return for you, you need to review the return before you sign the return or the e-file authorization. They are also required to give you a copy of the return they file for you.
If you really need to get a refund advance, investagate the company and make sure you understand all the due dates and who is responsible for doing what. Don't assume -ask!