Wednesday, January 28, 2009

Give Away Your Tax Refund

As tax season really gets geared up, many taxpayers are in a panic to get their returns done as soon as possible to receive their refunds. A great deal of tax preparation shops will prepare a taxpayer’s return based on the information from their last pay stub (as I am sure many have seen in the commercials) and they also offer to get your money back to you in as little as 24-48 hrs. Let’s look a bit deeper into how this process works and see if it is really a good deal.

So it is now the end of January, and due to the state of the economy now you want your money back from taxes fast. Most taxpayers do not realize that getting a refund back should not be the goal of their tax strategy. What a refund means is that you paid too much into the tax system and the government is giving you YOUR money back. That means that you loaned the government your money for a year and did not earn any interest on it.

You then proceed to the nearest tax preparation shop and have your taxes prepared where you are then offered to receive you tax return in as little as 2 days via a Refund Anticipation Loan (RAL). This offer may sound good, but don’t forget nothing is done for free. There are additional fees (including the tax preparation fee) that are included in this offer, which can include:

• Refund Account Fees to the Bank making the loan
• Document Preparation Fee to the Tax Preparation Firm
• Finance Charges

In the end, the money you loaned the government with no interest is cut down by additional fees leaving the taxpayer with less money in an economy that is taking a toll on everyone. The tax payer also pays finance charges that have an annual percentage rate of over 100%. A typical $1300 tax refund will be slashed to around $900 when all the fees are deducted. Something to think about as cash strapped taxpayers in this economy.

Keep Your Home Finances N Synergy


Anonymous said...

This is extremely insightful information! Thanks for bringing this to our attention. What's the best way to "break even" for lack of a better word?

Unknown said...

One way is to ensure that your withholdings are correct on your W-4.