It’s YOUR Money

Dear Dr. Per Cap: It’s tax time and I have a lot of money coming to me. I was thinking of taking out a loan against my tax refund because why should I wait if I don’t have to?

Signed, Tired of Waiting

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Dear Waiting: How you would feel if you loaned someone $2,000 and they waited a year to pay you back? Then, to make matters worse, they only gave you $1,700?

Sound ridiculous?  Most of us would probably think so, but if you’re like millions of Americans who pay to have their taxes prepared every year, this might be what is happening to you.  Here’s how.

The refund you receive after filing your tax return often comes from having more money withheld from your paychecks throughout the year than you actually owe in taxes.  And for many, this over payment of tax amounts to thousands of dollars.  Now you might prefer overpaying to avoid owing the IRS additional money at the end of the year.  That’s fine as long as you understand that your refund is not free money or a bonus, as some mistakenly believe.  But rather, money (that belongs to you) that the government “holds” during the year and then pays back the following year.  It’s really like giving a loan to the U.S. government … but Uncle Sam does NOT pay interest on it. 

I made the mistake one year of taking out a loan against my tax refund so I could my money sooner. When all the dust settled, I figured out I had paid $400 to someone just to get my money one week faster. Those tax preparation fees and loan fees really add up!

So watch out for those high fees that many tax preparation businesses charge to complete fairly simple returns (close to $300 in some cases).  If you choose a high-interest refund anticipation loan that promises a faster refund than direct deposit, then you’ll pay even more. 

Does this sound like free money to you? 

If you don’t like people getting a cut of your free money, consider consumer friendly tax-preparation options such as Volunteer Income Tax Assistance (VITA).  VITA sites serve many Native communities and will prepare your taxes for free if you meet certain income requirements.  And finally, stay clear of those loans against your tax refund. With direct deposit or the IRS debit card, you’ll get your money quickly in 5-7 days anyways. You shouldn’t have to pay extra to get at your free money!