As tax filing season approaches, people who are expecting a
tax refund for 2014 are eager to get their hard-earned money back
in their hands. But with several different ways to get your 2014
refund faster, you have to be more careful than ever to avoid
costly traps for unwary taxpayers.
The wrong way: tax refund advances
For years, taxpayers frequently used refund anticipation loans to
get early access to their money. Under a refund anticipation
loan, your tax preparer would figure out how much the IRS owed
you and then offer to give you that money immediately. Taxpayers
didn't have to wait weeks, or even months in some cases, to get
access to their refunds.
The problem, though, was that businesses charged substantial
fees in connection with those loans. In 2006, California's
attorney general sued
, alleging that its refund anticipation loan business failed to
disclose the true cost of fees and interest charges associated
with the loans. In 2010,
voluntarily chose to stop offering loans, and later that year
federal regulators ordered
-- which had provided loans through H&R Block -- to stop
making refund anticipation loans.
Refund anticipation loans are now effectively unavailable, but
they have been replaced by similar products. Refund anticipation
checks and tax refund advances involve a similar fee-laden
business model, with high interest rates and added fees that can
escalate effective financing costs dramatically. Some lenders now
offer loans that get around regulations by not being directly
tied to refunds.
These products have also raised concerns.
, for instance, entered into a proposed class-action settlement
agreement in May 2013 over allegations that a refund-processing
service it offered to help users pay for its TurboTax fees
violated prohibitions against refund anticipation loans. Whatever
they're called, in most cases, paying huge fees just to get your
tax refund for 2014 a week or two earlier isn't worth it.
The right way: electronic filing plus direct deposit
By contrast, combining two well-established methods -- electronic
filing and direct deposit -- can expedite your tax refund for
2014 more without incurring big fees. The IRS said it issued 90%
of refunds in less than 21 days after receiving those taxpayers'
returns last year. Sending returns electronically starts that
clock running a lot faster.
In addition, using direct deposit to have your tax refund for
2014 put into your bank account electronically saves even more
time. Having your refund delivered by snail mail and driving to
the bank with your paper check add to the overall time you'll
wait for your refund.
Admittedly, using the combination of direct deposit and
e-filing won't get you your 2014 tax refund immediately. But it
get you every single penny you deserve -- which is a lot more
than some alternative methods can say.
Be smart about your taxes
Not letting others reap the rewards of your tax refund for 2014
is just one way you can plan to cut your overall tax bill. In
our brand-new special report "
How You Can Fight Back Against Higher Taxes
How You Can Fight Back Against Higher Taxes," The Motley Fool's
tax experts run through what to watch out for in doing your tax
planning this year. With its concrete advice on how to cut
taxes for decades to come, you won't want to miss out.
Click here to get your copy today -- it's absolutely free.
has no position in any stocks mentioned. You can follow him on
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