If you normally use your income tax refund to pay for your Christmas presents, listen up. You’ve got a problem.
First, nobody is doing Christmas loans. Remember when H&R Block and Jackson Hewitt used to provide loans against your refund? Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans. A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between. Most people had to wait for two to three weeks to get their refund.
Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21st like they had previously announced—they won’t accept returns until January 28th, and maybe not until February 4th.
What does this have to do with Christmas? Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest. If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.
So what other options do you have? For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck. If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents. If it’s already December by the time you see this—it’s probably too late.
Here’s something else you need to know. If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return. You might think that you’re filing on January 3 or 4th, but you’re not. What they’re doing is “stockpiling” your return. They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.
Why is that important to know? Because people think that they need to file early to get their refunds. But those early returns are often wrong. They’re missing information, or the software’s not fully functional yet. The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies. If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back. It’s too late. And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.
There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts. But you know what? Christmas comes every year. Every year! Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash. Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas. Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.
You may have noticed that it’s harder to get a Refund Anticipation Loan (RAL) these days. Between actions by the IRS and some bank regulations, the RAL money is pretty hard to come by. You will still get your income tax refund, it just won’t be as fast without the RAL. On the bright side, RAL charges are really expensive and the money you save could be worth the wait.
You’ve probably heard advertisements on TV that say you can get your refund in as little as 8 days. It’s true, but you need to know the whole truth, it could be 8 to 14 days. Also, if you do one of those Refund Anticipation Checks (RACs), that’s where the fees you pay to a preparer are taken out of your refund, then that could add another 1 to 3 days onto the timeline. I believe in “truth in advertising.” I’m hearing a whole lot of “Get your money in as little as 8 days” and “without even paying anything up front” but I’m not hearing about the extra time added for doing that, or the extra cost. You need to know the whole story.
One thing you should know about is timing. Thursday is the important day. The IRS issues checks on Thursdays. The cutoff for determining what checks get written is the Thursday before check writing day. That means, if you have your taxes prepared and submitted on Wednesday, and you’re doing a DIRECT DEPOSIT into your personal bank account, then you’ll receive your IRS refund in 8 days; one week from the Thursday cut-off. If you have your taxes prepared on a Friday, then you’ll get your refund almost two weeks later instead.
Remember, the cycle runs on Thursdays; your refund will be computed on the first Thursday and the check will be cut on the second Thursday.
So, the best day of the week — in order to get the fastest refund – is Wednesday. Now, if you file your taxes on Thursday morning, you might be okay. If the filing is received by the IRS by noon, you’ve made the cut-off and you’ll receive your refund the next week. The catch here is you might go into an office, file your return and have it sent before noon, but there are things called “batch systems” that may prevent your return from actually being received before noon by the IRS. If you file on Wednesday, all those batches will be processed before noon on Thursday and you’ll receive your refund the Thursday after that.
I always recommend filing on Wednesday over Thursday morning just to avoid the risk of being held up in the batching. (Most preparers have no control over that.) Of course, the important thing is to just file when you’re ready. Don’t file before you have all of your documents. Remember, your employer isn’t required to have the W2’s completed until January 31st. If you happen to get your paperwork early, consider yourself lucky.
Just because the IRS issues checks and does its DIRECT DEPOSITs on Thursday doesn’t mean you will receive your money on Thursday. If you are doing a RAC, where you had your fees withheld from your refund, then your IRS refund is going to go to a bank that works with your tax preparer and then the bank will direct deposit the money into your account. There’s a time lag there that can be for as long as three days. You need to keep those things in mind when you’re looking for your money.
Keep your money in mind also as you listen to those TV commercials. “You can have your refund with no money due from you when you file.” That’s all fine and dandy, but how much money are they keeping? There will be a fee for the tax preparation, plus a fee to the bank for bank processing, plus a fee for completing the paperwork required by the bank. Make sure you know how much you’re spending for that convenience. Depending upon your situation, it may be well worth it to pay the charges, it may not be. Ask questions, know what you’re buying so that you make an informed decision.
The fastest way to get your income tax refund, without using a loan program, is to e-file your taxes on a Wednesday and have your refund DIRECT DEPOSITED by the IRS into your personal bank account.
Have you ever gotten one of those Refund Anticipation Loans (also known as RALs) with your tax return? Those are the “fast money” refunds where you pay a fee and get your refund immediately, or perhaps in one or two days instead of waiting for two weeks. What the IRS has just announced could pretty much put and end to those types of loans.
In the past, the IRS has provided tax preparer firms and financial institutions with a “debt indicator” tool. Basically, when a tax return was prepared, if a person applied for the RAL, there would be a response about any government debt owed by the individual. Basically, if debt was owed, the RAL would be denied because the loan is secured by the anticipated refund.
According to the IRS, they no longer see a need for these Rapid Refund Loans since a person can receive his or her refund in 10 days. There’s been a great deal of public pressure against RALs. Consumer groups such as the National Consumer Law Center and the Consumer Federation of America have opposed RALs for years. One reason is that RALS are usually targeted at low income households and the fees are often very high in relation to the loan provided. The profit motive in RALS can sometimes lead to predatory and even fraudulent activity. In 2008, the latest year that I could get figures for, 8.4 million RAL loans were made. $738 million was spent on loan fees. $68 million was spent on other related fees.
Individuals will still have access to their own personal information concerning debt via the “Where’s My Refund?” application on the IRS website.
For a look at the IRS press release dated August 5, 2010, click here: http://www.irs.gov/newsroom/article/0,,id=226310,00.html