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    Taxes and Loan Sharking

    The tax preparers have seen the light and realize there is more money to be made being loan sharks than by preparing your taxes. And they have taken it to a whole new level this year by not even requiring you to fill out a tax return...simply bring in your year end pay stub, they will do the calculations and send you on your way with a loan that any loan shark would be proud of.

    The more common name the tax preparers roll off their tongues is "refund anticipation loans" ( RALs) but don't be fooled by the innocent sounding name. Those that request RALs are typically charged fees for the refund anticipation loan, for electronic filing, for tax preparation and for a short-term bank account for those who don't have a checking or savings account. These fees can reach as high as $500, depending on the size of the loan. So you'll end up paying hundreds of dollars in fees for getting your money a few weeks early which can work out to an interest rate of over 1000%.

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    But the tax preparers take it a step further even beyond loan sharks. Not only do you pay up to triple digit interest rates on the loan, but you are paying these rates to <b>borrow your own money</b>. You read that correctly. Unlike a credit card loan (or a loan shark loan), you aren't borrowing someone else's money - the money is the extra money you paid to the government which is already yours and you are entitled to (we won't even get into the fact that you have been loaning this money to the government interest free for the entire year).

    And what do you get for paying these huge rates to borrow your own money? Not a whole lot. You get hold of your money a few weeks early at best. While many people believe that it will take months to get their tax return refund (as this was the case years ago and they still hold that image), the truth is that the IRS has greatly improved their refund turn around time and if you file online, you can expect to get your tax refund in as little as 10 days. Even if you file the old fashion way through snail mail, you should get your refund in less than a month.

    Even worse, there are plenty of alternatives where you can get your refund for free for those willing to put in even a small amount of work. Probably the best financial move you can make is to go to your company's personnel department and adjust your W-2 income tax withholding so that you don't receive a refund. This will give you more money in each of your paychecks throughout the year and also means you won't be giving the government an interest free loan of your money each year.

    Even if you march in and change your W-2 income tax withholding today, it won't help you with your tax return this year. Even so, you can still get your tax refund quickly by filing your tax return electronically through the <a href="http://www.irs.gov/efile/article/0,,id=118986,00.html" rel="nofollow">IRS Free File Program</a>. As long as your adjusted gross income is under $52,000, you can do this for free, so there isn't any reason to do your taxes by hand.

    If you want to speed up your tax refund as much as possible, consider having the refund direct deposited into your bank or savings account. With a new program this year, you can have the money directed into as many as three different accounts. Opting for the direct deposit should get you your refund in about 10 days after filing. Direct deposit also gives protection against lost or stolen refund checks that sometimes occur when refund checks are sent by regular mail.

    If your adjusted gross income is over $52,000, you still can <a href="http://www.linkconnector.com/traffic_affiliate.php?lc=007398005294002200">file for free with TaxAct</a> which lets anyone use its standard version for free. With this program, you have a choice of filing over the Internet or downloading the TaxAct software onto your computer. The TaxAct offer is limited to federal tax returns. If you choose to go with TaxAct, be warned that you'll have to endure constant promotions for their paid version called TaxAct Deluxe.

    For those with low incomes, you can even have someone help you prepare your tax return in person to make sure you receive all the deductions and credits for which you're entitled. IRS volunteers offer free tax preparation to those with low incomes across the country at specific sites in each state during tax season. To qualify for this free service, your adjusted gross income must be less than $39,000. You can locate the nearest Volunteer Income Tax Assistance office by calling the IRS at 1-800-829-1040.

    While there may be a few financial emergencies that could justify paying loan shark interest rates for a refund anticipation loan, 99% of people have absolutely no good reason to go this route. You worked hard for the money that is being returned by the government, so make a little effort to make sure you keep all of it.

    #2
    Re: Taxes and Loan Sharking


    Exactly right!

    First of all, you are only allowed to "borrow" an amount based on your anticipated refund. If this amount is significant to start with, then you have already screwed up by letting Uncle Sam hold onto your money, interest free, for no good reason.

    Secondly, why pay high interest to a tax preparer for such a refund anticipation loan? People often do this, and the current hook for some of these "lendings," because they have overspent for Christmas and need the cash. If you manage your money with any positive degree of responsibility, you should have no need for the "loan."

    Lastly, you can get your own refund back relatively fast anyway. Why the extra rush? Just file as soon as you have all your tax-related documents and e-file.

    Of course, my statements here only echo what Jeffrey has already written above. Bottom-line, its just not a smart move.

    Comment


      #3
      Re: Taxes and Loan Sharking

      I have to correct (possibly) Jeffrey's statement.
      The form to change your withholdings is a W-4 (which subsequently changes the amounts on your W-2).

      Comment


        #4
        Correct. The W-4 is how you change your withholdings. If you fail to fill out a w-4 with your company the IRS will withhold the highest tax rate possible.

        Comment


          #5
          Agreed many people give the IRS an interest free loan. It is usually in your best interests to have your taxes withheld today:

          1) Many people will spend the money leaving them with unpaid taxes later
          2) Saving Rates or CDs are at lows
          3) You are required to make estimated payments during the year. The IRS by the end of the year should have 75% usually of your total taxes.

          Comment


            #6
            Originally posted by backtaxpro View Post
            Agreed many people give the IRS an interest free loan. It is usually in your best interests to have your taxes withheld today:

            1) Many people will spend the money leaving them with unpaid taxes later
            2) Saving Rates or CDs are at lows
            3) You are required to make estimated payments during the year. The IRS by the end of the year should have 75% usually of your total taxes.
            Nobody here is suggesting that you not have taxes withheld. We just advise that you not have extra withheld. If you are getting a tax refund of more than a few hundred dollars, you could easily correct that by adjusting your deductions.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              It seems like a better idea to keep track of the calculations. Home tax preparation software will work for most people. There might be a benefit if you have bought and sold many stocks and want to have someone verify that your assessment of the capital loss as it offsets capital gains tax.

              IRS: Sir, you claimed to pay no taxed this year but, due to section 17485A, you now owe us $200,000. Armed men are being dispatched to your door.

              Comment


                #8
                This is crazy! Cant believe I had no idea about any of this.

                Comment

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