Using a Refund Advance to Expedite Your Tax Refund [2022]

As Tom Petty quaintly sang, “Waiting is the hardest part.”  When you have something you want and the only thing separating you from it is patience, self-control often proves difficult to maintain. Applying this concept to tax refunds, while waiting for the money to hit your account, you can find yourself beginning to visualize the multiple intended uses of the funds coming to you. Though, before you swipe that credit card or write that check, Uncle Sam needs to sign off on your tax refund and then send you the funds in one of three methods: as a direct deposit, written check or in the form of U.S. Savings Bonds. In recent years, however, some clever companies have found a way around this time delay by offering products now commonly referred to as refund advance loans or refund anticipation loans. These tax preparation companies have partnered with financial backers (typically online banks) to extend lines of credit to their customers as a means to incent them to use their service. Some refund advance loans come to the customer at no cost while others generate fees and interest income to the tax preparer and financial partner. In effect, these refund advance products act as loans against your anticipated tax refund and pose relatively low risk compared to other loans. The reason for this is because Uncle Sam carries a similar level of reliability as the Lannisters made famous in “Game of Thrones”: he always pays his debts.  Or at least he has in our living memory. Because of this low perceived risk, the refund anticipation lender sees your future tax refund and knows the government will pay an amount sufficient to satisfy the loan. However, while on the surface this seemingly looks as a way to get what is owed to you sooner, be aware that the specific product details matter.  These financial products, while useful for managing your cash flow needs, can still present financial costs through fees and interest. Before proceeding toward one of these tax refund anticipation loans, make sure to read more below about the advantages and disadvantages of these loans as well as the numerous mechanics behind how they work.

How Tax Refund Advances Work

---

When you offer a homogenous, undifferentiated product or service, you seek alternative marketing promotions for bringing customers through the door. In the case of tax preparation, this could be superior customer service, refund accuracy guarantees, or additional services which might entice a customer to choose your service (or buy the best tax software from you). With the fierce and intensifying competition in the tax return preparation space, some have found another method for building a powerful brand and standing out from the crowd: tax refund anticipation loans. These products offer nearly instant access to cash equivalents (usually in 24-48 hours in the form of a branded debit card) as you wait to receive Uncle Sam’s approval on your tax refund. These products, essentially short-term loans against your anticipated tax refund, provide liquidity until the IRS decides to issue your return. Upon refund issuance, the lender takes the appropriate amount of money to satisfy the loan and extinguish the debt, effectively repaying the loan. Typically, the earlier you file your return, the earlier you will receive your refund. The IRS begins accepting completed tax returns in mid-January, however, in those instances where you claim a refundable tax credit (specifically, either the additional child tax credit or the earned income tax credit), the IRS must, by law, delay issuing these refunds until mid-February. This allows the IRS to take extra precaution when reviewing your return where you claim a refundable credit before issuing a refund. Despite filing early, the average expected delay can range anywhere from 2-4 weeks from filing to receiving a refund.  Even by e-filing and requesting direct deposit of your refund, it can still take time to process and issue your refund. Because of this, some companies have sought to trim this time by offering refund anticipation loans.  If the 2-4 week time frame does not fit with your cash flow needs, refund advance loans (when used without costs) might prove a useful tool for your needs. To receive a refund anticipation loan, after the tax preparer has identified and reviewed your stated tax refund, a partner lender will originate a loan (usually at a fixed dollar increment not in excess of your refund or as a percentage of your refund). You have access to this line of credit until the IRS issues the refund. When the IRS issues your refund, the lender will claim their amount to satisfy the outstanding loan, with the remainder transferring to the taxpayer. Be aware, often this extra refund comes to the taxpayer through the same payment method as the refund advance loan proceeds. In other words, if you received your refund advance on a prepaid debit card, the tax preparer and lender will issue your excess refund on this same debit card. Continue reading to learn about the advantages and disadvantages of these financial products and weigh whether they make sense for your financial needs.

• Refund Advance Loan Advantages

As the common expression states, “Cash is king.”  When you have a pressing financial need and ample liquidity can resolve your problem, you make moves within your financial toolkit. With tax refunds, after filing your return and knowing you have a decent chunk of cash coming your way can be empowering, if only it could happen sooner. When you encounter one of these cash crunches, not needing to borrow on a costly line of credit (e.g., credit cards, personal loans, or payday loans) can serve as a valuable tool. Some refund advance loans come free of charge, costing you nothing and merely act as a product feature to attract you to that company’s tax preparation product. In instances like these, exploring a refund advance loan might act in your best interest because it provides funds you need now at no cost against money you know will be yours in the near future. However, not all products are created equal.  Some products, like Jackson Hewitt’s Go Big Refund Advance loan charges a 2% fee and interest. Further, the calculated annual percentage rate, or APR, is 29.2% under the assumption the loan duration lasts 25 days.  The effective APR will vary, however, based on the number of days outstanding on the loan. Loan amounts are available between $1,000 – $6,400 to qualified borrowers starting on January 2, 2020 through February 2, 2020. Because of these high costs, make sure to read the fine print on whether these products cost you anything as well as how you receive the funds. Some lenders require the funds to appear onto branded free debit cards, limiting your liquidity to events which accept debit cards or cash (ATM withdrawal, though withdrawal fees may apply). Note: In all instances of refund advance loans reviewed for this post at the time of its publication, the funds will not appear as a direct deposit in your checking account.

• Refund Advance Loan Disadvantages

Refund advance loans provide ready access to a known sum of money belonging to the taxpayer. Though, with modern electronic data processing used by the IRS, reviewing tax returns has left less delay between filing and receiving a refund. In fact, the IRS tends to review and remit refunds within a 2-4 week window. As such, if you have the financial fortitude to carry expenses until receiving the refund, an anticipation loan might not be helpful, but detrimental if fees and interest factor into the product. While these interest and fees appear relatively small depending on loan size, their true cost often compare to that of the most costly credit cards, exceeding 36 – 60% APRs. Relative to the short-term benefit provided by the loans, they can represent a cost-prohibitive form of financing. Product terms will vary but as an example, Jackson Hewitt provides three unique Refund Advance products:

1. Early Refund Advance: $200 – $500 available without fees before 2020 with qualified documentation
2. No Fee Refund Advance Loans: $200 – $3,200 without fees
3. Go Big Refund Advance – $1,000 – $6,400, 2% fee

For the Go Big Refund Advance loan, if you applied for a $5,000 loan and incurred a 2% fee, you would in effect pay $5,100 back on the loan.  On an annualized basis, this represents a potential 24% or more interest charge (2% fee for a 2-4 week refund advance loan * 12 months). While certainly a significant cash flow when you might need it, the financing charge represents a costly source of short-term financing.  Often, people see tax refunds as a self-enforced bonus check by receiving a decent chunk of cash from the IRS. However, this money is not in excess of your ordinary earnings, meaning the IRS does not pay you additional money for the pleasure of holding money on your behalf. Rather, you have provided the IRS an interest free loan on your own money you have not had access to for the previous year. Stated succinctly, your tax refund represents money you overpaid during the tax year. A better method for managing your paychecks comes through filing an amended Form W-4 and adjusting your periodic tax withholding. Doing so will lessen the amount of money paid to the IRS each paycheck and also reduce the amount of tax refund you can expect to receive the following year. This provides more access to cash as you earn it and potential for avoiding any cash crunches in the future. Cash management is pivotal for reaching financial independence.

Available Refund Advance Options

---

• How Much Money Can You Get?

In 2020, four national companies will offer refund advance loans at the time of this publication. Three companies, H&R Block, Jackson-Hewitt and Liberty Tax, maintain extensive retail branches to meet their customers’ needs while TurboTax appears as the sole tax software-only company) will offer tax refund advances. Last year, TaxSlayer announced a refund advance product but one cannot be found on their website for 2020. Each company offers unique increments or amounts for their refund advance products. The largest range of available loan options comes from Jackson Hewitt, offering as low as $200 on its Early Refund Advance product while its Go Big Refund Advance loan can reach as high as $6,400.  The former costs nothing while the latter tacks on an additional 2% fee. When reviewing the available online refund advance loans, the lower amounts tend to avoid any interest or fees while the larger loans come with them. Also, per company websites, applying for a refund advance loan does not have an impact on your credit score.

• Available Annual Percentage Rates (APRs)

As with any search for cost-effective financing, you will need to consider the interest rates for these loans.  For benchmarking, the most-commonly cited financial metric is the APR. Assessing financing costs with this metric provides for an apples-to-apples comparison among refund advance loans. While free loans have a 0% APR, some products can carry almost 50% in APRs, depending on loan terms.  Suddenly, that small percentage added to your loan repayment looks a lot worse.

• Applicable Fees

Variance exists for any financial product when it comes to fees.  As is often said, “The Devil is in the details.” Because of this fine print dictating a lot of the overall cost of a financial product, understanding the fees assessed becomes paramount. While some refund advance lenders charge nothing, others assess a percentage for originating the loan.  For the refund advance loans charging fees, please see the following for more accurate information:

1. Jackson Hewitt assesses a fixed 2% origination fee on its Go Big Refund Advance product
2. Liberty Tax assesses a fee with an equivalent APR of 35.99%
3. TurboTax has no fee on its refund advance product offered through Green Dot Bank
4. H&R Block has no fee on its refund advance product offered through Axos Bank

When a refund advance does not cost anything, these products simply represent a faster avenue toward receiving your refund.

• Refund Advance Deadlines

The type and timing of refund advance loan products vary.  Some offer small loan amounts before 2019 ends, provided you can supply adequate documentation (paystub or other evidence of your income before your Form W-2 arrives in January).  Others primarily focus on the early filers who seek to claim the refundable tax credits flagged by the IRS for a more thorough review (i.e., the additional child tax credit and the earned income tax credit). Because many filers who claim these wish to file as early as possible (because they know a refund awaits them), they understand a multiple week gap awaits between filing and receiving their refund.  These refund advance loans make sense (if free), because the IRS issues these refundable tax credits during tax season and cannot be received on a prorated basis throughout the year by adjusting your tax withholding. Most companies advertise near immediate access to the refund advance funds, usually within 24 – 48 hours of applying. This compares favorably to the 2-4 weeks filers must wait for the IRS to issue qualified tax refunds.

• Form of Proceeds from a Refund Advance (Prepaid Debit, Bank Transfer)

When receiving a refund advance, many of these companies provide the funds through a branded debit card.  Normal debit card transaction fees (e.g., ATM withdrawal fees) apply as they would for any debit card. Alternatively, you can pay applicable fees to have the refund advance proceeds transferred into your bank account.

The Bottom Line on Refund Advance Loans

Refund advances can represent useful tools for managing your liquidity.  However, they can often come paired with sky-high costs, relative to the short-term loan received. In instances where lenders originate these loans at no cost to you, pursuing a refund advance loan makes perfect sense.  The primary limitation in this circumstance comes in the form of how loan proceeds transfer to your care. Debit cards can hinder your access to complete liquidity you might receive from the IRS as a direct deposit, U.S. Savings Bond, or physical check. Review the below online tax software packages or consider visiting your local retail branch for the tax preparers listed.  But most importantly, to manage your cash flow better, consider adjusting your tax withholding to get your money throughout the year (as opposed to a refund).