Tax Refund Loans: How They Work and When to Get an Advance

Tax season is a lot like Christmas, except the Grinch is back and he’s brought a flamethrower. Especially if you’ve left preparing your return too late or haven’t saved your receipts, it can be hell on a skateboard. The news isn’t all bad, though: you may be eligible for a refund. As long as you follow the rules and fill out the forms correctly, these are basically granted automatically.

This means that the Federal Government owes you money, for a change. In accounting, debts owed to you are treated as assets, meaning that you can now take out a tax refund loan, even if bad credit puts the best personal loans out of your reach.

What Is a Tax Refund Loan?

There are basically two kinds of loans: secured and unsecured. An example of an unsecured loan would be an online payday loan; your ability and willingness to pay are confirmed only by your income and your word. A mortgage or car loan, by contrast, is secured: there’s something of value backing it, and if you can’t pay, the bank has the option of repossessing and getting their money back. Similarly, a tax refund you’re sure to get, even though it’s not a physical object, is something you own and can borrow money against.

The main difference between the two is that secured loans come with much lower interest rates. In simple terms, same day cash loans can become hugely expensive over time because you have to pay back much more than you borrowed. If you get a tax day loan, on the other hand, you may even have to pay no interest at all. You can think of it as just like depositing a post-dated check with your bank and using the funds immediately: the bank can’t be 100% sure that the check will be honored, but they’re willing to make that assumption and let you have the cash now.

The Pros and Cons of Tax Advance Loans in 2020

“Can I get a loan against my tax refund?” is not the only, nor even the first question you should be asking yourself at this point. Taking on debt is sometimes the smart move, but it isn’t a step you should take lightly or without weighing your options. You should know that these loans, though they’re often far and away from your best choice, don’t actually tax day freebies and do have at least one major drawback.

Instant tax day loans, like payday loans, are very fast and easy to obtain and usually run to a few hundred dollars, making holiday tax loans USA’s best option for small emergency loans between December and February. Their low interest rates make them especially attractive for early filers who need their earned income tax credit and additional child tax credit money as soon as possible. Normally, these checks are only sent out well into the new year even if you file on January 27 (the first day of the 2020 season), but a tax return advance places the cash in your hands today. Once your refund is processed, the loan gets paid off automatically.

Income tax loans are run as a business, of course, so how does the lender make money off a low-interest or even 0% loan? In general, they don’t just allow you to say that you’ll be getting thousands of dollars back and hand over some cash. Even when applying for the same day tax refund loan, they will check that all your forms, as well as supporting documents (W-2’s, 1099’s, etc.), are in order.

This usually isn’t free, which brings us to why tax advance loans are often a bad idea. Though using their services may end up saving you money, either by allowing you to claim more deductions and tax credits or by catching a mistake (and hence keeping the IRS off your back), it makes no sense to spend $100 to borrow $200 for two weeks.

Remember that individuals can file for free, even online if your gross income (total, from all sources) doesn’t exceed $69,000. If you use e-filing and choose direct deposit, you can typically expect your refund to arrive in your bank account in under a month in any case, so there may be little actual difference between getting a tax day loan and just waiting out a lean month.

How to Get a Loan on Your Tax Return for Cheap?

The larger part of the cost of getting a tax day loan is usually the application fee. Evaluating your return forms will cost around $50 at a company that specializes in refund advances. This is assuming that your tax return is not too complex – no earned income tax credit, a single source of income, taking the standard deductible and so forth. The more work they have to do, the more you’ll usually pay. You may also have to wait longer for the money to show up in your account.

At worst, you could end up shelling out a few hundred dollars, which is only worth it if a) you were planning on using a tax preparation service anyway, or b) you need to borrow at least $3,000 and you need it urgently. There may also be an additional cost if you want them to send you a check or prepaid credit card instead of transferring the money to your bank account.

The best advice is, therefore, to shop around diligently. If a company uses tax return loans to attract new customers rather than make a profit, they may well offer you zero fees and 0% interest. Of course, this sometimes means that they won’t spend much time verifying that you qualify for the refund you’re expecting, which may end up causing problems for you later.

The Place that Does Tax Return Loans Near Me Charges $350 to Prepare an Itemized Return, Is this Worth It?

Tax rules (and how they’re applied) are complicated and change all the time – keeping up with them is a full-time job. If you’re self-employed, have a side hustle that’s going well or earn a high salary, it can make sense to pay a legit accountant to prepare an itemized return, where each deduction is listed (and proved) separately. If you’re sure that your total deductible expenses for the year are less than the standard deductible, however, you’re better off just ticking that box.

The standard deductible (i.e. how much the government is willing to assume you can legally deduct) is currently $12,200 for single filers and $14,400 for married couples filing jointly.

If you’re fortunate enough to exceed that threshold, though, tax preparation services can certainly save more money than they cost, including by getting some trustworthy advice on subjects like:

• Are your educational, childcare and medical expenses deductible?
• If you’re planning to buy or sell a property, are there tax breaks you can take advantage of?
• Is it better to buy or lease a car?
• Can you claim a reduction in tax on personal loan interest, or does this only apply to mortgages?
• If you own a cryptocurrency that’s, at the moment, worth more than you paid for it, is that considered capital gains?

Answering these kinds of questions is normally simple once you know your financial situation and how all those tricky rules and exceptions work – but learning all about those probably isn’t the best use of your time.

Who Can Tell Me How to Get a Tax Refund Loan Advance? What Do I Need?

Companies that offer online tax refund loans tend to keep the paperwork to a minimum. In the first place, your expected refund should be about $500 at least – lending out less than that isn’t worth their time. Additionally, you’ll need the basic documents that prove the information on your return. If you work for an employer, this will be a W-2, but if you receive income from other sources like a business or investment, you’ll also have to request one or more 1099’s. If you’ve made a charitable donation and want to claim it as a deduction, you have to ask the charity to send you a receipt.

Most people who apply for an income tax loan will not have to scan and email too much stuff, though. If the company you’re applying to requires anything more than the basics, perhaps because you’re borrowing a large sum, they’ll be happy to explain what they need in detail.

Where Can I Get a Loan on My Taxes Today?

Many independent accountancy firms that do tax preparation offer tax advance loans to their clients, either as a way to make more money or just to attract new business. There are also a couple of good nationwide options with generally positive reviews:

Jackson Hewitt

This company is one of the most popular options for tax advance loans. They allow you to borrow any amount between $200 and $6,400, possibly at zero percent interest, as long as you let them prepare your return. A number of programs are on offer, including their Early Refund Advance Loan that allows you to borrow up to $500 even before your employer has given you your W-2. Larger loans may be subject to a charge of 2% of the total amount in addition to the tax preparation fee.

TurboTax

Intuit TurboTax is a software package used to prepare income tax returns; it also allows you to file your returns online. Assuming that you qualify for their Turbo Visa debit card, they also offer quick tax advances of up to $2,000 as long as you file through them. Your money can be available, at least for online purchases, in under an hour, while it takes one or two weeks for the physical card to be shipped to your address. If you plan to do your own taxes, this is probably the cheapest option, as they have a totally free version of their software that allows you to handle simple returns.

H&R Block

H&R is also a software company that will load your funds onto their own branded prepaid card but requires you to physically visit one of their offices to apply for a tax advance. This isn’t necessarily a bad thing: their trained representatives will actually analyze your financial situation and suggest ways to save more on taxes. This consultation costs around $60 for a basic return (though you may have to pay quite a bit more) and you can borrow up to $3,500 from them.

Is Taking out a Tax Day Loan Risky?

Keeping on top of your finances is partly about managing risk, and managing risks starts with knowing what they are. While online tax refund loans are usually quite easy and stress-free, you should be aware of the following:

• New scams seem to pop up like mushrooms these days. Whenever money is involved, vultures can be found circling. With tax day loans, one point of concern is that your refund is sent to the company that filed your returns, not directly to you. You needn’t worry about this as long as you use one of the three companies mentioned above, but some fly-by-night operators have been known to file a fraudulent return on your behalf and then leave you to deal with the mess. Dealing with a respected name or an accountant you know personally is really the best idea.
• While instant tax day loans of less than about $500 are often given at a rate of 0%, the interest charged on larger amounts can be over 35%. If your return takes longer than expected to be processed, this will bite your wallet hard. $2,000 borrowed for 3 months, for instance, will cost $175 over and above the initial application fee.
• Some of your tax credits or deductions might end up being rejected by the IRS, in which case your refund will be smaller than anticipated. If this happens, you’ll still have to repay the loan in full, meaning money out of your pocket.

Despite their intimidating reputation, IRS personnel are professionals. If you’ve made an honest mistake and try to meet them halfway, they’ll be happy to offer you a deferred payment plan or other relief 99% of the time.

• Understandably, companies that offer these kinds of loans like to be reimbursed, by the IRS, as soon as possible – they have bills to pay too, after all. We’ve been warned that returns which include certain types of deductions are going to take longer to process in 2020. If any of these apply to you, act early or pay more: early income tax loans may work out cheaper since refunds are issued in the order they’re applied for. Some loan companies may even tack on interest or extra fees if it takes too long for them to receive your refund, even though this is out of your hands. As always in finance, the fine print matters.

Alternatives to a Tax Refund Loan

Before making a decision involving hundreds of $$$, it’s usually a good idea to think not only of whether or not you should but also what you can do instead. Here are a few suggestions:

• Lower your refund amount and have more money each month. If you get a large refund every year, you might want to consider reducing your withholding amount by filling out a new W-4 form. The withholding is the money your employer pays to the government every month on your behalf. Just be careful not to cut this too close to the bone, or you may be hit with a tax bill you can’t afford to come next year.
• Look into other forms of credit. If your tax situation is fairly simple and you don’t expect to get all that much money back from the Federal Government, you may be better off filing the forms yourself for free and looking at ordinary Christmas loans. This is more or less just another name for personal loans. A payday alternative loan from your credit union is another option. At the end of the day, though, the average delay between filing an electronic return and the IRS wiring your refund to your account is only three weeks – do you really need any kind of loan for that period?
• Think about changing your plastic. Many new credit cards have a 0% interest rate during an introductory period, though you may have to pay a fee to borrow cash on these. If you do a little research, switching credit cards may save you a lot more than just the application fee for a tax refund loan.

Final Thoughts

We hope you’ve enjoyed exploring the ins and outs of instant tax day loans with us. Though they’re only available during a few months of the year, knowing they exist and how they work can be extremely useful. Just remember that there’s usually no such thing as free money: know what you’re getting into and how much it will end up costing.

Thank you for reading!

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IRS / Jackson Hewitt / personal loans / taxes / TurboTax