If the term tax refund advance stirs up thoughts of predatory lending, that’s because they used to be. Today, these types of loans are another way for tax preparation stores to up their foot traffic — and they’re becoming increasingly popular. While a tax refund advance may be inexpensive if your tax forms are simple, most people won’t actually be able to get one for free.
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What exactly is a tax refund advance?
A tax refund advance — also known as a tax refund loan — is a small loan based on your expected federal or state refund. Tax preparation stores typically won’t charge interest, although this isn’t guaranteed. They also have deadlines for when you need to file your taxes by — typically sometime in February.
It’s a fast form of financing: You can get your money in as little as one day with some providers. And there’s no need to make repayments. Once your federal or state refund comes through, the tax service deducts your loan amount from your refund before sending along the rest of your money. Tax preparation services use them as a way to bring in customers to their brick-and-mortar stores. This works because tax refund loans almost always require you to apply in person.
In fact, it’s an increasingly popular type of financing. Around 1.7 million Americans applied for one in 2017, according to a study by the National Consumer Law Center.
How much does a tax refund advance cost?
Tax refund advances often don’t come with interest or financing fees. But while you may not need to pay anything to get an advance, you will still need to pay to have your taxes filed through the company.
Expect to pay between $50 and $500 when filing your taxes in a store — though it can go much higher. The one exception is for those filing Form 1040EZ, the simplest of tax filings, which sometimes doesn’t require an in-store fee. Call ahead to make sure this option is available to you.
Prepaid debit card fees
Some services require you to sign up for a prepaid debit card to receive your refund. These cards often come with fees that can sneak up on you — like withdrawal fees, payment fees and even ATM decline fees. Fees are typically small — $2 or $3 for the most part — but they can add up over time, especially if you’re not aware of them.
You might be able to opt out of the prepaid debit card by asking for a check or having your loan deposited directly into your bank account. You probably won’t get your funds as quickly, however.
What is a holiday tax refund advance?
Typically, most tax refund advances are only available starting in January or February. A holiday tax refund allows you to access a smaller advance in December to help offset your holiday expenses. Most holiday advances are worth $1,000 or less, depending on your income.
To apply for a holiday tax refund, you usually only need a paystub or your proof of income for the year. A tax professional then issues an advance based on your estimated tax return amount — sometimes within minutes. The amount is either credited to a prepaid card or deposited to your banking account within one to five days.
Holiday tax refund advances typically come with higher fees or APRs than a regular tax refund advance. For example, Jackson Hewitt charges a fee of 6% of the loan amount and an APR of 34.22%. Like a regular tax advance, it is paid back automatically when the IRS issues your tax refund.
Who is eligible for a tax refund advance?
It varies by provider, though many have standard eligibility requirements that include factors such as your creditworthiness, income and past financial history.
But the two most important factors to qualify are:
- Have your taxes prepared in person. You can only get a tax refund advance from the company that’s also doing your taxes — and most require you to visit a tax adviser in person. The one exception is Intuit TurboTax, which allows you to e-file your taxes and apply for an advance fully online.
- Know how much you’re getting. You can typically look up your estimated refund when applying through one of these services.
How to apply for a tax refund advance
Most tax preparation companies require you to apply for a tax refund advance in person when you meet with a tax specialist to complete your taxes. The one exception we found was Intuit TurboTax, which offers an online application.
Case study: Tax refund advance for car repairs
Imagine this scenario: Nora’s car breaks down in January, and she can’t scrape together the money to cover the repair costs. She knows her family is due a tax refund of around $4,500 after claiming an Earned Income Tax Credit. She decides to apply for a tax refund advance of $1,000 to cover her car repair costs so she can get to work. First, she talks with her local Jackson Hewitt, H&R Block and Liberty Tax locations to see how much her filing fees might cost.
She finds that Jackson Hewitt has one of the most expensive filing fees:
She also considers the financing fee each provider charges. In the case of H&R Block and Jackson Hewitt, that fee is $0. For Liberty Tax, the fee is equivalent to an APR of 35.99% — nearly the legal limit.
After looking at potential fees, it’s clear to Nora which is the least expensive: H&R Block. Knowing her only alternative is a payday loan, Nora chooses to take advantage of the safer tax refund loan, which doesn’t have the potential to result in more debt.
The next day, Nora goes to H&R Block, pays to have her taxes done and applies for an advance. And she’s soon back on the road.
Who could benefit from a tax refund advance?
Aside from the 1040EZ tax filers who often don’t have to pay anything to file their taxes with a provider, deciding to take out a tax refund loan is not always an obvious choice.
Anyone who relies on tax refunds to cover basic personal expenses might benefit the most from an advance — if your expected refund is high enough to make the filing fee worth it.
You might also benefit from a tax refund loan if:
- You claim an Earned Income Tax Credit or Additional Child Tax Credit. These deductions could mean you’re waiting for more than $6,000 in tax credits that you need to support yourself and your family. But federal regulations require extra scrutiny for EITC and ACTC claims, possibly delaying your tax refunds.
- You file early. You could get some of your tax refund before the holiday season, a convenience that possibly offsets fees, depending on the service you file with.
- You need money and can only qualify for a payday loan. If you’re in a pinch and can only qualify for a payday loan with triple-digit APRs, then it might be cheaper to apply for a tax refund advance.
Is a tax refund advance worth it?
It may be worth it if you’re expecting a big advance and already use a tax preparation service. But if you’re only expecting a return of $500 or $600, you might want to take advantage of one of the many free tax preparation options and take out a personal loan to cover your personal financial needs.
Think about it this way: You’re likely paying at least $100 in tax preparation fees to get a small portion of your $500 return two months faster. When you do the math, that means you’re paying about 20% of your refund for the convenience of using it early.
If you’re considering this route, do the math to make sure it’s worth it for your needs.
What if I’m denied a tax refund advance?
If you’re denied a tax refund advance, most lenders will issue a letter explaining why you were not eligible. Here are some common reasons you may be denied:
- Your tax refund was too low, or you owe money on your return.
- You did not meet the lender’s eligibility requirements for the advance, such as a low credit score.
- You have debt owed to a state or federal institution, such as child support, tax liens or student loans.
- You did not agree to the lender’s terms and conditions.
It may be worth reaching out to the lender to discuss why you were denied and if anything can be done to reverse that decision. Sometimes the lender is simply missing some documents. If that’s the case, you may still have time to send them in and qualify for an advance. But if you were denied because your credit score is too low, for example, you may have to take steps to improve your credit score and try again during next year’s tax season.
5 alternatives to getting an advance on your tax refund
The fees for filing your taxes in person can be expensive. If your refund isn’t big enough to justify the costs, consider using a free online service and opting for one of these financing options instead:
- Pay advance app. Depending on your income, you may be able to get an advance through a pay advance app. While you may need to pay a fee, it is typically much less expensive than paying the tax filing fee if you have a complicated return.
- Personal loan. If you have one big expense you’re hoping to cover with your tax return, it could be worth it to take out a personal loan for $5,000. Look for a loan that doesn’t come with prepayment fees so that you can pay it off as soon as you get your refund.
- Credit card. Use your credit card to cover day-to-day expenses and then apply your refund to pay off as much of your card’s balance as you can. It could be a bit more expensive than a personal loan, but it might be cheaper than a tax refund loan.
- Direct deposit for your refund. You won’t get your refund months in advance, but you can get your tax refund a bit faster if you ask for direct deposit instead of a physical check when filing your taxes.
- Short-term loan. Payday loans come with more risk. But if you can afford to make payments on time and can’t qualify for another option, a short-term loan that you pay back within a few weeks or months might be able to help you during an emergency.
Before a government crackdown in 2012, you might have come across refund anticipation loans. These loans functioned like a tax refund loan but came with high interest rates and fees on top of any tax prep charges.
It’s harder to find anticipation loans today, but they do exist. Look out for lenders charging:
- Application fees
- Technology fees
- E-filing fees
If you think you might be the victim of a predatory lender, file a report with the Consumer Financial Protection Bureau.
If you rely on your tax refund to cover personal expenses, need it to offset the cost of the holidays or have an emergency that you don’t have the funds to pay for, getting a tax refund loan could be a safer alternative to other types of short-term financing.
But tax refund loans aren’t free. If you weren’t planning on having your taxes filed by an in-store professional, you could be shelling out an additional $150 to $300 for this service, depending on the complexity of your taxes.
You can explore other options with our guide to personal loans.
Frequently asked questions
How long will it take to get my refund after filing my taxes?
For most people, it takes about 21 days to get a tax refund. It could take longer if you file for a tax credit, like the Earned Income Tax Credit or Additional Child Tax Credit.
Can I get a tax refund advance in March?
Probably not — most tax refund advances stop being available at the end of February. However, keep in mind that if you e-file your taxes, you can receive your refund in as little as 11 days.
What happens if I take out a tax loan but don’t get the refund I expected?
You might not have to pay back the difference, depending on your situation. It might be best to consult a lawyer to make sure you’re not liable.
How much does the average tax preparer charge?
The average tax preparation charge to submit a 1040 and state return with no itemized deductions was $220, according to the 2020-2021 Income and Fees Survey from the National Society of Accountants. The average cost for the most common type of tax return — the 1040 with Schedule A — and a state return was $323, however.
What can I do if my tax preparer makes a mistake?
First, pay whatever penalties you’re charged by the IRS. Then contact your tax preparer to discuss the situation, file an amended return and ask for reimbursement of your penalties.
If your tax preparer refuses to reimburse you or fix any errors, you might have cause to file a lawsuit, claiming your tax penalties as damages. Carefully read your contract to learn how your preparer handles mistakes, and speak to a professional organization like the American Institute of Certified Public Accountants to learn about potential next steps.