It’s a good idea to mull over other strategies before applying for a tax Refund Anticipation Loan (RAL). Just make sure they’re appropriate alternatives. Here are a few to consider:
1. Adjust your withholding. If you’re getting a big tax refund, that can mean that you’re having too much money withheld from your paycheck. You might do better to take a little bit out as you go by adjusting your withholding rather than waiting for a lump sum at the end. If you’re not sure where to start, grab a copy of your last tax return and your most recent pay stub and consider making some changes to your form W-4.
re2. Consider borrowing from another source not tied to your tax refund. The Tax Cuts and Jobs Act (TCJA) limits your ability to deduct the interest if you refinance your home, but there may still be a financial (non-tax) benefit to borrowing against your home. You may also qualify for a short-term loan from your bank or another lender that you could pay back with your tax refund without shelling out extra fees. Depending on the numbers, this could work out in your favor.
3. Open a savings account. Taxpayers often treat refund checks like forced savings accounts. If that’s the case, consider adjusting your withholding (see again #1) and open a savings account. If you’re not certain whether you’d qualify, ask around. Look for banks and credit unions that offer savings account with a low minimum balance. With direct deposit, you can route funds directly from your paycheck to your savings account: if it’s not in your hands, you may not be as tempted to spend it. Figuring the amount to save is easy. Look at your last few refund checks. Take the average – let’s use $1,500 as an example – and divide it by the frequency of your pay (if you’re paid weekly, that would be 52). In our example, that works out to $28.85 per week: that’s the amount to sock away each paycheck to save the same amount as you would have received as a tax refund. Bonus? You’ll earn interest (remember: the IRS isn’t giving you any).
4. Don’t cheat yourself out of deductions and credits. In the rush to get a tax refund, many taxpayers speed through their returns or rely on unskilled or unsavory tax preparers. Don’t underestimate the value of using the services of a competent tax professional who might be able to make recommendations and find deductions and credits that you might be missing. Spending the time to find a qualified tax preparer – especially one without an incentive to sell you extra services – may yield more tax savings in the long run.