Is an advance on my 2025 tax return refund an option for my finances at this time?

Tax refund loans, often provided through tax preparation companies rather than traditional banks, can offer quick access to funds. However, the costs associated with these loans may outweigh their benefits.

Key Takeaways

  • Tax refund loans allow you to access a portion of your tax refund before the IRS processes your return.
  • These loans are often offered by tax preparation services as an advance on your tax return.
  • Some refund loans may carry high fees, making them less cost-effective than they appear.

While a sizable tax refund in spring is a welcome financial boost, sometimes financial needs can't wait. Tax refund loans can provide early access to these funds but come with potential pitfalls.

“Consumers should carefully consider the advantages of having quicker access to the money versus the costs incurred to obtain the loan,” advises April Walker, lead manager for tax practice and ethics with the American Institute of Certified Public Accountants.

Below, we explore how tax refund loans work, where to find them, and whether they're the right choice for you.

What Is a Tax Refund Loan?

A tax refund loan, also known as a refund advance loan or refund anticipation loan, allows taxpayers to receive a portion of their anticipated refund before the IRS processes their tax return. These loans are particularly appealing to those needing funds quickly. If you e-file and choose direct deposit, the IRS typically processes refunds within three weeks, but a refund loan can provide access to money much sooner.

Where Can You Get Tax Refund Loans?

Refund loans aren’t available directly from banks. Instead, they’re typically offered by tax preparation services. These companies provide an advance, deducting fees or other charges from your final refund. Eligibility criteria and costs vary.

Jackson Hewitt

Starting December 16, 2024, Jackson Hewitt offers two tax refund loan options for the 2025 tax year:

  • Early Tax Refund Advance Loan: Designed to cover holiday expenses with an advance on your refund.
  • No Fee Tax Refund Advance Loan: No interest or fees, available when filing taxes with Jackson Hewitt.

H&R Block

H&R Block offers the Emerald Advance Loan in November and December, followed by a no-interest Refund Advance Loan beginning January 3, 2025. Customers can apply in-office or remotely.

TurboTax

TurboTax partners with First Century Bank to offer Refund Advance loans. Applications are open from the start of the IRS tax season through February 28, 2025.

How Do Tax Refund Loans Work?

Tax refund loans are typically available when you begin the tax filing process with a preparer that offers them. The loan amount, a portion of your estimated refund, is repaid to the lender once the IRS issues your refund. Any remaining funds are disbursed to you after repayment.

Loans often cover only a fraction of your refund. For example, TurboTax provides a maximum of 50% for refunds between $500 and $999.

Robert Farrington, founder of The College Investor, notes that refund anticipation loans are most common for taxpayers eligible for the Earned Income Tax Credit (EITC) or Additional Child Tax Credit. Refunds for these taxpayers, if filed correctly and electronically, are usually available by late February.

Pros and Cons of Tax Refund Loans

Pros

  • Quick Access to Funds: Ideal for taxpayers facing immediate financial needs.
  • Alternative to Expensive Loans: May be less costly than payday or title loans.

Cons

  • High Costs: Fees or interest can make these loans expensive. Some providers may charge fees on prepaid debit cards used to disburse funds.
  • Potential Liability: IRS adjustments or errors could reduce your refund, leaving you responsible for repaying the full loan amount.
  • Limited Eligibility: Complex tax returns or small refunds may disqualify you.

Alternatives to Tax Refund Loans

If you’d rather avoid a tax refund loan, consider these options:

  1. Personal Loans: Personal loans offer fixed interest rates and predictable monthly payments, with amounts ranging from $1,000 to $100,000, depending on creditworthiness.
  2. Expedited Refunds from Banks: Certain banks, like Chime and Varo, advertise the ability to release tax refunds up to five days earlier.
  3. File Taxes Quickly: E-file with direct deposit to receive refunds in less than 21 days. Double-check for errors to avoid delays.
  4. Adjust Tax Withholding: Update your W-4 form to reduce withholding, ensuring more money in your regular paychecks rather than waiting for a large refund.

Conclusion

Tax refund loans can provide much-needed financial relief in the short term but often come with significant costs and risks. By considering alternatives or planning ahead, you may be able to avoid these loans altogether.  If you are interest in tax planning and advisory services feel free to contact our office at 📞718.825.1623 or 👉 💰💸SignatureAssets.com

This content is based on Zina Kumok and Jerry Brown’s article originally published on December 13, 2024, in U.S. News & World Report.

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