Beware the hidden cost of an early tax refund
We live in a society of instant gratification — cell phones and other mobile devices offer instant access to new music, movies, and other entertainment. It’s not a stretch to extend this idea to our financial affairs; ATMs offer 24-hour access to your money, and more and more transactions take place over the Internet.
This time of year, many families are looking forward to their tax refunds. That combined with the headache of sorting through tax documents and finding what credits you’re eligible for (especially with the new stimulus credits coming), we all feel that the money is somewhat of a reward.
But families, especially working families, must be aware of the dragon lurking in the darkness. His name is RAL.
RALs, or refund anticipation loans, are short-term, high-interest loans made by tax preparers that allow the taxpayer to receive their anticipated refund instantly.
There is little regulation of RALs, and they are increasingly being offered by the same predatory lenders like payday loan companies. Tax preparers and lenders have no restriction on the amount they can charge for a RAL, which means that working families can end up paying a high-interest rate for a loan as short as a few days.
In fact, the preparer doesn’t even have to tell the tax filer that they’re getting a loan — just that they can receive their refund right away. The RAL can eat up a significant chunk of a family’s refund.
But it’s their money, right, so what does it matter?
Actually, much of it is public money that comes from other taxpayers. Many low-income working families receive a variety of tax credits.
The federal earned income tax credit (EITC) is one such refund. Last year, New Mexico’s working families received more than $370 million from the EITC. New Mexico’s working families tax credit (WFTC) refunds another 10 percent of the EITC amount. Both credits were designed to help lift working families out of poverty, and provide financial assistance to families and children in need.
But this money can end up going to an unintended source — the tax preparer.
In 2005, almost 200,000 New Mexico tax filers received an EITC, and one-quarter of these filers got a RAL. According to H&R Block’s Web site, a RAL for about $1,000 refund costs $140 — or, more than 10 percent; more than what is refunded by the WFTC.
Tax filers may be so enticed by the instant gratification of a quick refund that they may not carefully consider the financial consequences. Some don’t realize that they can get their full refund if they are willing to wait a few days.
Many also do not realize that free tax preparation is available to low-income families, and, when returns are filed electronically, they can get their refund in as little as a week. Direct deposit can make the wait even shorter.
Simply put, the practice of RALs damaging the abilities to work families to improve their economic status.
The legislation was introduced in the recently concluded legislative session that would have required that tax preparers disclose that what they are offering is a loan, and what the interest rates will be. Unfortunately, that bill went nowhere.
Predatory lending practices are nothing new, but in economic times such as this, we need to keep as many families afloat and out of poverty as we can.
Regulation of RALs through the full disclosure of fees, disclosure of how long the refund normally takes, and a limit on the amount a tax preparer or lender can charge, will help solve this problem.
But the problem can only really be solved if state lawmakers show more concern for the welfare of New Mexico’s low-income working families than the welfare of unscrupulous businesses.