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Why You Shouldn’t Request a Tax Refund Advance

Why You Shouldn't Request a Tax Refund AdvanceTax season is officially upon us. As we scramble to collect all of our W-2s, 1099s, receipts, etc., we start to think about our tax refund.

Remember that getting a tax refund from the government means you paid too much money in taxes throughout the year. They are giving you back the money that they borrowed.

If you are getting a large tax refund, you should discuss your withholdings with your tax preparer or accountant so you can lower them. Lowering your withholdings will decrease your tax refund next year, but it will give you more money in your take home pay every month.

Getting a large tax refund is bad enough, but I’ve gotten several advertisements in my mailbox over the past few days encouraging me to borrow against my expected tax refund by requesting a tax refund advance. If you are expecting a refund and need money immediately, you could apply for a tax refund advance. But, here’s why getting a tax refund advance is NOT a good idea.

It’s a Short Term Fix

If you are strapped for cash and need money now you can get it with a tax refund advance. This advance is similar to the payday advance loans. You’ll get the money now, but when you need it later you won’t have it.

Getting advances of money is a the struggle because you’ll have to come up with more money to pay off the advances when they come due. Chances are high that you won’t have any money then either. It’s a vicious cycle that’s best avoided. Start budgeting and saving an emergency fund so you can avoid these options and have the relief knowing you are covered should something come up.

Your Taxes Must Be Prepared by That Company

Due to a law passed in 2012, these tax refund advance companies can’t charge fees or interest in order to protect you. To get around this companies have made it mandatory you have them file your taxes. The gotcha is that they can charge you more for their services, and they may try to get you to pay for unnecessary services you don’t even need. Once your tax refund comes in, you won’t get the full amount. Instead, you’ll get the amount minus what you were advanced.

What Happens If Your Tax Refund Advance is Denied?

Even if your tax refund advance is denied, you still have to pay the tax preparer for their services. If you think you’ll get a tax refund advance and you have your taxes prepared, you may not have the cash to pay the preparer is you are denied an advance. This can put you farther in the hole as you’ll need more money that you don’t have.

Fees Add Up

A tax refund advance is usually placed on a debit card of some sort. Most ATMs charge a $2.50 to withdraw your money. If you make multiple withdrawals, your fees can easily add up and the amount you’ll have to spend is less.

While there are no lending fees or interest due for a tax refund advance, it is still like a loan. It is still money you will have to pay back when you get your actual tax refund. A tax refund advance should only be used as a last resort. Even then, it should be used with caution.

It’s easy to get swept up in the cash you have now and not plan ahead for when you’ll have to repay the advance. A better alternative is to budget and save up an emergency fund, so you never have to count on a tax refund to help your finances. This way any refund you get will be a cherry on top of your already good personal finances.

 

Have you ever gotten a tax refund advance? Do you expect a tax refund this year?

 

Photo courtesy of: Cobanams

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Kayla is a mid-20s single girl living in the Midwest, USA. She is focused on paying off her consumer and student loans, while simplifying her life and closet. You can join her on her journey at ShoeaholicNoMore or follow her on Twitter.

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3 comments

  1. “If you are getting a large tax refund, you should discuss your withholdings with your tax preparer or accountant so you can lower them. Lowering your withholdings will decrease your tax refund next year, but it will give you more money in your take home pay every month.”

    BIG AMEN to that. Surprised how many people think a big refund is a good think. Nope, it isn’t.
    Brad – MaximizeYourMoney.com recently posted…How to not freak out when the stock market dropsMy Profile

  2. As a tax preparer I try to explain to my clients why a large refund isn’t good. The only time it is good is if you qualify for a couple of thousand dollars in child tax and earned income credit. But the other side of that is whether you are earning enough income to comfortably support your family if you have 2 or 3 children. I will say that in the paperwork for the refund advance it states that if the client is approved for the loan but later denied a refund they do not have to pay back the loan. We can’t tell them that though. The likelihood of that happening must be pretty slim for that to be the case.

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