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By: Jean Chatzky, SavvyMoney.com, January 2018
Would you rather wait three weeks to receive $3,000 — or receive some of that money now? It’s the financial version of the “marshmallow test” measuring instant gratification, made famous by psychologist Walter Mischel in the 1960s. And it’s a game a number of tax preparation firms are rolling out in real time, with very little in the way of strings or fees attached.
Here’s the deal. H&R Block, Jackson Hewitt and Liberty Tax are offering up to $1,300 advances on tax refunds. But these are not your parents’ “refund anticipation loans.” Those products — which accumulated interest at high rates if your refunds didn’t come through as anticipated and potentially impacted your credit — were largely shut down by federal regulators in 2012. These don’t. If your refund isn’t as large as anticipated — or you don’t get one at all — the company eats what it paid and writes it off as a cost of acquiring new customers.
Here’s how the early refund process usually works: You apply for a short-term loan with a company’s financial partner (often a bank). Approval generally only takes a few minutes. The company typically offers you a partial amount of your expected refund — for example, $1,000 for your expected $2,000 refund — and you receive a pre-loaded debit card in the mail. It’s usually also possible to take the card to an ATM and withdraw the money in cash, so you can deposit it in the bank. Otherwise, you can use the card to pay bills or make purchases. Once the IRS issues your refund, the financial institution typically deducts what you owe them and sends you the rest.
The catch is that you’ll generally pay more for tax prep involved in getting this early refund. With the exception of Credit Karma Tax’s Earlybird Advance product, you have to do your taxes in-office in order to qualify. That’s more expensive than DIY-ing it with software. The average cost of filing a return in-office at Liberty Tax is in the $190 to $200 range, while their online filing products cost between $14.95 (for simple returns) and $69.95 (for small business owners). At H&R Block, the average in-office filing cost is around $220 range, while online products range from $0 (for simple returns) to $74.99 (for small business owners). And though filing with Credit Karma Tax is free, the company uses consumer information to make product recommendations and send partner offers. (That means you’ll get emails recommending certain credit cards and other services.)
Is it worth it to take advantage of these offers? Perhaps. Most refunds are issued within 21 calendar days. But filers claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) likely won’t receive their refunds until the week of February 27, according to the IRS. Why? It’s because of a new law aimed at preventing fraud. It may also be worth noting if you were going for in-office help anyway. Tax-prep companies, which have been struggling due to the rising popularity of cheap online tax software, are swallowing both the cost and risk of their early refund services, hoping the offer of fast cash will lure in new customers. (Each funded loan will cost H&R Block an average of $32 to $36, according to the company’s 2017 annual report.)
The final thing to consider: What are you going to do with this quick money? If you’ve got credit card debt, for example, on which you’re paying high interest, getting out sooner rather than later can be worth it. Just read the fine print on what you can do with the card your money comes on. But if it’s going to tempt you to spend on things perhaps you don’t really need? “The IRS is typically turning refunds around in 15 to 30 calendar days, so how fast do you really need your money?” says Ryan Mitchell, an enrolled agent based in Hoboken, New Jersey. Better to take the refund the old fashioned way — and consider diverting a chunk of it directly into an IRA contribution, where it can help you out in the future even more than it’s helping you out today.