Tax Refund Advance: All You Need to Know
Introduction
During tax season, taxpayers eagerly anticipate their tax refunds. However, the wait for a tax refund can be long and cumbersome. This is where tax refund advances come in. Tax refund advances allow taxpayers to receive all or a portion of their tax refund in advance, alleviating the financial burden of waiting for the refund. In this article, we will discuss everything you need to know about tax refund advances.
What is a Tax Refund Advance?
A tax refund advance is a type of financial service that allows taxpayers to receive part or all of their tax refund before the government sends it. While tax refund advances used to be offered predominantly by tax preparation companies, many banks and financial institutions now also offer this service.
Types of Tax Refund Advance
There are two types of tax refund advances:
1. Prepaid Cards: Prepaid cards are a popular option for tax refund advances. Instead of receiving a paper check, taxpayers may opt to receive their refund on a prepaid card, often with added benefits such as cashback rewards.
2. Loans: Tax refund loans, also known as “refund anticipation loans,” are another type of tax refund advance. These loans are often offered by tax preparation companies and financial institutions. The taxpayer borrows money based on their expected tax refund amount and pays back the loan plus interest when the refund is received.
Benefits of Tax Refund Advance
The main benefit of tax refund advance is the ability to receive a portion or all of your expected tax refund in advance, which can be especially appealing for taxpayers who need the money for unforeseen expenses. It also eliminates the uncertainty of when the tax refund will arrive.
Risks of Tax Refund Advance
While tax refund advances may appear to be a convenient way to receive a tax refund early, there are risks involved. The main risks include:
1. High Fees and Interest: Tax refund advance loans often come with high fees and interest rates, which can add up quickly.
2. Inaccurate Tax Filings: It is important to note that the amount of the tax refund advance is based on the expected refund amount, and if the tax return is not filed correctly, the refund could be less than expected, resulting in the taxpayer owing money on the advance.
3. Approval Requirements: Not all taxpayers are eligible for tax refund advances, and some companies may require proof of income or credit checks before approving the advance.
Conclusion
In conclusion, while tax refund advances offer a tempting alternative to waiting for a tax refund, taxpayers should carefully consider the risks and fees associated with this service before committing to it. Taxpayers may want to consider other options such as filing their taxes electronically for faster processing or consult with a financial advisor before opting for a tax refund advance.
A tax refund advance is similar to a payday loan or a refund anticipation loan. IN essence a tax loan is a short-term consumer loan that is secured through the individual’s expected tax refund. Over 75% of tax applications are met with tax refunds, meaning the federal government supplies the taxpayer with funds to make up for the taxes that were paid throughout the taxable year.
All workers or employees fund government programs and pay government taxes every pay cycle; the government withholds salary and income every pay period. If the amount withheld exceeds that taxes owed, a tax refund is sent by the government to counteract the imbalance. Therefore, tax refund advances utilize the expected tax refund (which is collected after tax day on April 15th) to supply the individual with a lump sum before tax day.
A tax refund advance is designed to offer the borrower quicker access to the funds; waiting months to receive a tax refund can cripple an individual who has mounting debts or expenditures. As is common with most loans, a tax loan has a fee attached. Although tax refund advances are not attached with interest payments, the fee associated is a flat rate that is to be paid upon the obtainment of the loan.
To simplify, tax refund advances are secured loans, that use an individuals expected tax refund as collateral. The loan is supplied to the individual before they obtain their tax refund.
