Most people wait until the absolute last minute to file their taxes. That’s to be expected. Who wants to gather all their financial information and sit for hours in front of a computer sorting through it and inputting numbers into a tax software or *gasp* by hand?
But, if you’re one of the few who decides to file months in advance, you may be eligible for a tax refund advance, which can be a lifesaver if you’re short on cash and need the money ASAP.
What’s Ahead:
What is a tax refund advance?
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A tax refund advance is essentially a short-term loan that is funded with your expected tax refund in mind. You may also hear these loans referred to as an instant refund.
The lender will provide a short-term loan that will be repaid after the IRS has processed your actual tax refund. In most cases, you’re only allowed to borrow up to 50% of your expected refund amount.
The total amount you might be eligible to receive generally varies from $200 to $4,000. However, the exact amount that you are eligible for will depend on how much you’re expected to get back from your refund.
When you take out a tax refund advance, the provider typically makes the funds available within a couple of hours to a few days.
Eric Bronnenkant, CPA/CFP and head of Tax at Betterment, says that tax advance loans can be a good alternative to other short-term loans, such as a payday loan, as they tend to have lower interest rates than those, with some preparers not charging any interest or fees.
He also points out that:
“unlike payday loans, they’re also paid off in full when the recipient’s tax return arrives.”
So you don’t really have to worry about keeping track of a repayment schedule, as the company will automatically collect its payment once the tax return arrives.
Read more: What is a payday loan and why is it a REALLY bad idea to get one?
Who qualifies for a tax refund advance loan?
Unlike other types of loans, which require you to fill out an extensive application, and pass a credit check for you to be approved, tax advance loans don’t require you to have good or excellent credit.
The only requirement, really, is that you’re expecting to get a tax refund and that you file your taxes through a tax preparer of some kind that offers this service.
Of course, if you owe money on your taxes, then you will not be able to claim a tax refund advance. Or if you only expect to receive a very small tax refund (usually less than $500), then some companies may not be willing to provide an advance.
How do I get a tax refund advance loan?
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Now that you know what a tax refund advance loan is, it is time to talk about how to get one.
Step 1: gather your tax documents
The first thing to do if you want a tax refund advance is to start working on your taxes. You can ensure a smooth process by collecting all of the documents you need before getting started. Take a look at the list below for the documents that you should start looking for:
- W-2 – If you have a regular day job, then you’ll likely have a W-2 that reports your wage and salary information.
- 1099s – If you work a side hustle or an unconventional gig as an independent contractor, then you may have 1099 to file alongside your W-2.
- Schedule C – If you own a business, then this form will allow you to report income and losses from that business.
- 1098 – If you own a home and paid mortgage interest this year, then you need to report that.
- Quarterly tax record – If you’ve paid quarterly taxes through the year, then you need to include that in your filing documents.
- Personal information – You’ll need to provide your social security number and some of your banking information to complete your tax filing.
Although this is not an exhaustive list of all possible tax documents that you might need, it is a good place to get started. For a more comprehensive list, read our article: Your tax document checklist – the no-stress guide to filing your taxes.
Step 2: file your return with a tax software or a tax preparer that offers this service
In order to apply for a tax refund advance, you must file your taxes through a tax software company or work with a tax prep professional that offers this service.
Personally, I work with a tax professional because it takes the worries out of tax season. I simply provide the information and they let me know if I’ll receive a refund or need to write a check to the IRS.
But if you’re unsure of which approach is the best for you, here’s a quick breakdown of the main differences between applying for a tax refund loan with a tax software service versus with a tax professional.
Applying for a refund advance with a tax software
Although you can choose the tax software of your choice, big servicers like TurboTax and H&R Block offer tax refund loans, without charging you any interest or fees. You’d just need to file your taxes with them, which could cost you a couple of hundred dollars.
Read more: Best tax software compared
Applying for a refund advance with a tax professional
Working with a dedicated tax professional is usually more expensive than prepping your taxes with a software company. According to the National Society of Accountants, in 2020, accountants charged between $220 and $323, on average, for filling out a 1040 form.
However, working with an accountant is the best course of action if you have a long list of deductions you’d like to claim, or if your tax situation is rather complex.
If you’re applying for a tax advance with your accountant, they will open a temporary bank account for you, where your refund will be deposited.
Once the IRS accepts your form, your accountant will then issue you the loan, in the form of a check, direct deposit to your checking account, or a prepaid debit card.
Then, when the IRS deposits your full refund on the temporary account, the accountant will collect the loan amount, plus any fees, and send you any remaining funds.
But whether you’re considering applying for a tax advance refund through a tax software company or a tax professional, Joshua Zimmelman, managing director of Westwood Tax & Consulting, says that the most important thing is to:
“make sure you that truly need it [tax advance refund], and that the lender provides you with all the information on fees and interest rates, and that they are appropriate.”
Should I use my tax refund as an emergency loan?
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Overall, a tax refund advance could act as a useful emergency loan. Since there are no fees and 0% APR associated with most of these loans, it will not cost you anything (besides your tax preparation fee, of course) to take out these loans at some tax preparation companies.
Additionally, since these loans are issued based on your expected refund, not on your financial situation, they won’t impact your credit in any way, shape, or form.
Still, there are some drawbacks to consider, including the following…
They’re limited
We already talked about how most of these loans only allow you to borrow up to 50% of your expected tax refund, but there are other limitations. First, not all tax preparers offer this service, so you’ll need to do some research in order to find one that does.
Then, there’s the issue of timing. Unlike personal loans, payday loans, and car title loans, which are available all year round, tax refund advance loans are only available until mid-to-late February. That means you’ll have to file your taxes early in order to access this service.
Some places may charge high interest or fees for this type of loan
Diana Gamboa, founder of Diana’s Tax Services, says that while her company does offer 0% APR tax advance loans of up to $1,000 through EPS Financial, any advances that exceed that amount carry a whopping 36% APR, “which is extremely high,” she says.
That’s why it’s super important to ask your preparer what their fees are for these types of loans, before taking the plunge, as it may not be worth it.
You could end up owing money even after receiving your full refund
Mathematical errors can occur, and there’s also a chance that the IRS could deny some of your claims.
If that happens, and your final check isn’t enough to cover the costs of the loan, you’ll have to pay any remaining amount out of pocket.
So, yeah, that’s something to keep in mind.
Other ways to fund your emergency
If you are in need of cash quickly, then you have other options. A few good ones include:
- Consider a 0% APR credit card. Although you’ll need excellent credit to qualify for most 0% APR introductory offers, these are a good alternative to borrowing against your tax refund. Additionally, you’ll have a few months to repay any unexpected charges, without incurring any fees, plus you could earn rewards for each dollar you spend. You can find some of our suggestions here.
- Apply for a personal loan. Many lenders offer painless online loans with relatively affordable interest rates. Here are a few of our favorite loan lenders.
- Pick up a side gig. We currently live in a flourishing gig economy, so if you’re short on cash, you could try pet sitting, or driving for Uber or Lyft to make a quick buck. Here are other side hustle ideas in case you’re interested.
- Ask for help. This is often easier said than done. After all, no one likes to be the family member or friend that’s asking for money. But, it’s better to get a loan from your parents or your friends than to owe money to the bank or another financial institution.
Summary
A tax refund advance can help you fund your immediate financial needs. These advances are generally accompanied by no fees or interest. However, you will likely be required to pay for your tax preparation.
Think about your unique tax needs before making a decision on whether or not to pursue a tax refund advance.
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