Advance tax-free loans: what you need to know

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A tax refund advance is a short-term loan that you repay with your tax refund. The amount you can borrow depends on your expected repayment and other factors. (Shutterstock)

Your tax return isn’t due until April, but if you’re waiting for a tax refund, you might not want to wait that long. You may be able to get some of that money sooner with a tax refund advance loan.

A tax refund advance is a short-term loan offered either by the company preparing your tax return or by a third-party lender. This article will help you determine if a tax refund advance is right for you.

What is a Tax Free Advance Loan?

A tax refund advance, also known as a refund advance loan (RAL) or refund anticipation loan, does not actually give you early access to your IRS refund. Instead, it lets you take out a loan against part of your expected tax refund. Tax refund advance loans are short-term loans — usually for a month or less — or until the IRS sends your full refund to your tax preparer.

Companies that prepare and file Tax returns are the most common places to find prepayment loans, but you can also find them advertised at car or boat dealerships, furniture and electronics stores, and other retailers. The application deadline for these loans is usually the end of February.

How Much Can You Get With a Tax Free Advance Loan?

The amount you can borrow with an advance loan depends on the company offering the loan and your expected federal income tax refund. For example, H&R Block and Jackson Hewitt offer tax refund advances up to $3,500, while TurboTax lends up to $4,000 and Liberty Tax offers refund advance loans up to $6,250. .

But don’t expect to be able to borrow the full amount if your prepayment is lower – most repayment advance lenders will only lend you around 25% to 50% of your expected tax refund.

For example, with TurboTax, if your expected federal refund amount is between $500 and $999, your maximum refund advance is $250. For repayments of $1,000 to $1,499, you can borrow up to $500, and so on. To get the full loan amount of $4,000, your expected federal tax refund would need to be $8,000 or more.

If your repayment won’t be large enough to qualify for a loan amount to meet your needs, you can consider a personal loan instead. Check out Credible for compare personal loan rates quickly and easily.

When will you receive your loan funds?

How quickly you can get your tax refund funds after you’re approved depends on the lender, but many companies advertise that you can get funds the same day you apply.

Are you eligible for an advance tax refund loan?

Not everyone is entitled to a tax-free advance loan. Although eligibility requirements vary from company to company, you generally must:

  • Be 18 or older
  • Agree to file your federal income tax return electronically
  • Have a valid address in the United States
  • Have income from a Form W-2, 1099-R, Schedule C, or Schedule C-EZ

Lenders may also consider your payment history with the IRS and determine if you have defaulted federal student loans, overdue child support, tax liens, or other situations that could cause the IRS to withhold all or part of your tax refund.

Some companies allow you to prequalify online so you can get a better idea of ​​your approval and how much you might be allowed to borrow. To prequalify, you will need to provide your social security number, last year’s reimbursement amount, and contact information. Remember that a prequalification is not a guarantee that your loan will be approved. You will still need to submit an official loan application when you file your return.

How much does a tax refund advance loan cost?

The cost of a repayment advance loan varies by lender. Many national tax preparation chains, including H&R Block and TurboTax, advertise prepayment loans with no finance charges, no loan fees, and a 0% APR. But you must agree to pay a fee to have your tax return prepared and filed electronically. These fees vary from company to company and can depend on the complexity of your tax return.

Other companies charge advance tax refund loans. For example, Jackson Hewitt does not charge a loan fee, but its prepayment prepayment loans have an annual percentage rate of 35.9% for 2022. Similarly, Liberty Tax charges an APR of 35.99%.

Fees for a prepayment loan typically range from $30 to $50, according to the Consumer Financial Protection Bureau. Most companies offering these loans will deduct your tax preparation fees, loan fees, and interest from your refund. You should also watch out for hidden fees. For example, if your loan funds are loaded onto a prepaid debit card, there may be transaction fees for using the card.

Taking out a personal loan is another option. Credible, it’s easy to compare personal loan rates quickly and easily.

How to apply for an advance tax refund loan?

Although the exact process for applying for an RAL varies by lender, it generally looks like this:

  1. Select a tax preparer. You select a tax preparation provider – either by visiting a storefront near you or online – and agree to have the provider prepare and file your tax return electronically. Let the preparer know that you want to apply for an early repayment loan.
  2. Apply for an advance tax-free loan. Once your statement is complete, the provider (or their lending partner) reviews your tax return, considers your income, credit, and repayment amount, and decides whether or not to approve your loan.
  3. Receive the loan funds. If your loan application is approved, the tax preparation provider or lender issues your loan by paper check (which may involve additional fees), a prepaid card, or a transfer to your regular bank account. The tax preparer also creates a temporary bank account in your name and instructs the IRS to deposit your refund into this account.

You may notice that you need to select your tax preparer and have your tax return prepared before you know if you are approved for the loan and how much you can borrow. This makes it difficult, if not impossible, to find the best tax preparation fees and loan terms.

How is the loan repaid?

You refund your tax refund advance on your tax refund. The tax preparer or lender has your tax refund deposited in a temporary bank account in your name, then deducts the loan balance, tax preparation fees, and any other applicable fees and interest from the account before give you the balance. Depending on the lender, you may receive the balance of your tax refund by check, prepaid card, or wire transfer to your bank account.

This is what makes tax refund advance loans risky. The loan is based on the amount you expect to receive from the IRS, and your actual refund amount may be less than you expected.

For example, if you owe the IRS or your state tax authority back taxes, child support, or have not repaid your federal student loans, the Treasury Department can seize any or part of your refund to pay this amount. outstanding debt. It is also possible that an error in your tax return will have an impact on the amount of your return.

If your actual tax refund is less than the loan balance, tax preparation fees, and other fees and interest associated with the RAL, you may owe money to the lender rather than getting a refund.

Why consider an advance tax refund loan?

A tax refund advance loan can be useful for taxpayers in the following situations:

  • You expect a substantial refund.
  • You don’t owe any back taxes, child support, or defaulted student loans.
  • You need the money right away to cover immediate expenses.
  • You work with a tax preparer who does not charge interest or fees for an RAL.

For example, if you have unpaid rent, utilities, or other bills, an RAL could help you save money and avoid eviction, shutting down your utilities, or being charged fees and additional penalties.

But if you don’t need the money right away, you could save money by taking advantage of a free tax return option, filing your return electronically, and having your refund deposited directly into your account. banking. The IRS claims that it issues over 90% of tax refunds in less than 21 days and that using e-file and direct deposit is the fastest way to receive your refund.

If your adjusted gross income is $73,000 or less, you may be eligible for free guided tax preparation through IRS Free File. You may also be able to get free tax preparation help from trained volunteers through the IRS’ Voluntary Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs. Visit the VITA/TCE localization page to find a branch near you and make an appointment.

What are the alternatives to the tax refund advance loan?

A cash advance loan isn’t your only option if you need cash fast. Consider these alternatives:

  • Low interest credit card — Depending on your credit, you may be able to qualify for a credit card with a low or 0% introductory APR. If you can repay the balance before the end of the promotional period, you will not pay any interest.
  • Loan between individuals — Peer-to-peer loans are similar to personal loans, but are funded by individual investors rather than financial institutions. These people may be willing to lend to people who are unable to qualify for a traditional bank loan.

If you decide to use a personal loan instead of an RAL, visit Credible to compare personal loan rates from different lenders in minutes.