The process of filing one's taxes is filled with great anticipation for some. If you are making a beeline to your mailbox or your company's website to obtain your W-2, you are likely in the group of taxpayers that expect a sizable tax refund. Additionally, there's a high probability that you may utilize a tax preparation service and apply for a Refund Anticipation Loan (RAL).
According to the Consumer Federation of America (CFA), a RAL is a costly bank loan that is secured by a taxpayer's expected refund, and carries an effective annual interest rate (APR) of approximately 149%. This is almost five times worse than the default rate on most credit cards. Believe me, I understand the desire to get your refund quickly, but you should never take out a loan to obtain money that's owed to you. Additionally, you should know that if the IRS reduces your refund for any reason, the entire amount of the RAL must be paid in full - hence, you will have to pay back the money out-of-pocket.
In the past, the IRS helped lenders minimize the chance of taxpayers receiving a RAL that would not be covered by their refund through the use of a debt indicator service. This service was similar to a credit check; it revealed whether or not a taxpayer's refund would be paid or used to cover government debts (e.g., taxes, outstanding child support, etc.). In August 2010, the IRS announced that it would stop providing the debt indicator service. While this news will not eliminate RALs, it will make them more difficult to get, and the associated fees will be even higher than they were before.
So, who are RALs targeted to? According to the CFA, RALs are particularly targeted to low-income working families that claim the Earned Income Tax Credit (EITC). In fact, over half of all RAL borrowers are EITC recipients - individuals that cannot afford to pay exorbitant fees to obtain their money. Additionally, during a national survey commissioned by the CFA, it was concluded that RAL users are more likely to rent instead of own their homes; utilize high cost financial services, such as rent-to-own, payday loans and pawnshop loans; and a significant number of them are African-American females.
Given the information above, I urge you to consider doing something different this year. There are services available to help you get your money quickly, and without the excessive fees that are associated with RALs. Included below are quick, cost-effective methods for obtaining your tax refund:
On January 13, 2011, the U.S. Department of Treasury announced a pilot project to offer 600,000 low-cost, prepaid debit cards to families who may not have a bank account. Consumers that receive the Treasury letter can quickly obtain the card to use for receiving this year's tax refund
Open a savings account if you don't have one, visit the I-CAN! E-File site (www.icanefile.org) or the IRS site (www.irs.gov), and file your taxes for FREE on your own!
Visit a Volunteer Income Tax Assistance (VITA) site. They will e-File your taxes for you. Tax-Aide sites save taxpayers money by eliminating the cost of RALs and tax preparation fees. To find a location near you, call (1-800-906-9887) or visit http://www.irs.gov
Now that you know better, you should choose to make better choices. After all, why pay for something that you can get for free? As you prepare to file this year's taxes, commit to the following:
1. Stay away from RALs and consider utilizing one of the tax preparation services noted above
2. Open a savings account if you don't have one. According to a study conducted by Insight Center for Community Economic Development, people of color are almost five times less likely than Whites to have a bank account
3. Deposit the fees that you would have paid on a RAL into your savings account to begin your nest egg. According to CFA, the average fees for an RAL (including tax preparation fees) are approximately $300
Remember, small steps can lead to significant change!
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