Avoiding a RAC keeps more refund in your pocket
Filing your income taxes is expensive because the United States income tax code, formerly known as the Internal Revenue Code of 1986 (IRC), is not the easiest collection of rules to understand, much less apply to your personal financial life. Most people seek advice and often tax preparation services from retail companies that are online or in brick and mortar locations where they live. Fees vary for these services and are unfortunately bundled with a confusing variety of ‘additional’ features commonly called ‘upsells’. Avoiding these add-on fees associated with tax preparation keeps more of your tax refund in your pocket.
One particular premium service people are offered is the Refund Anticipation Check or RAC. Some taxpayers who are receiving large refunds because they are eligible for Earned Income Tax Credit (EITC) or education credits are particularly susceptible to the sales pitch for this ‘value-added’ feature. The RAC, which is a type of short-term loan not to be confused with Refund Anticipation Loans (RALs), can be deducted from an anticipated tax refund. The current form of this financial product allows a tax payer to have their tax return electronically filed without upfront payment. A Refund Anticipation Loan (RAL), in comparison, is a ‘signature’ loan product that advances funds to the tax payer in ‘hours’ using their anticipated tax refund as collateral; the tax refund will at best require several weeks to process. Some major retail tax preparation companies have stopped offering RALs.
The RAC postpones payment for tax preparation and any accompanying bank service fees based on the amount of a taxpayer’s tax return refund; the taxpayer is expected to pay for filing services when the anticipated tax refund check is released. The RAC does not accelerate delivery of the refund. The balance of the refund, less the service fees for tax preparation and RAC handling, comes weeks later and is either issued as a paper check to the taxpayer or electronically deposited directly into a taxpayer’s bank account. If, for any reason, your income tax refund is delayed, the tax preparation company may quickly launch unpleasant collection efforts to recover their charges since they will consider their fees delinquent.
A more advantageous approach that will help you keep as much of your tax refund in your pocket as possible might be to:
- Establish a no-frills bank or credit union account. Consider the benefit of having your payroll checks or other sources of income directly deposited into this account as a way to avoid costly check-cashing fees. Savings from check-cashing services can save many hundreds of dollars.
- Anticipate paying for your tax preparation services at the time you file your tax return and avoid paying extra service fees. The RAC fees are charged because you are “postponing payment of your tax fees” over the three to four weeks it takes for your tax return to be processed. Paying for a RAC does not change how quickly the IRS will process your tax return or speed up the release an anticipated tax refund.
- If you expect to receive an income tax refund, direct deposit the money into your bank or credit union account. The refund is faster than having a check mailed to you and will not cost any extra fees. There is a printed section on the income tax form (IRS Form 1040EZ, 1040A, or 1040) that directs the Internal Revenue Service where to direct deposit your money. You will need your bank account number and your bank’s nine digit routing number. This information is typically found on the lower left edge of a personal check. Do not use numbers printed on deposit slips. Any accounts you specify must be established in your name. You do not have to pay any special or extra fees for direct deposit services.
Consider paying for your tax preparation fees rather than ‘charging’ them as a RAC
You can allocate your refund across several accounts using IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases). You can apply a tax refund to the purchase of paper Series I savings bonds up to $5,000. You can also request that a portion of the refund be mailed as a paper check.
Seek professional assistance when filing an income tax return but determine in advance the tax preparation fees. These services typically include electronic filing but do not cover other premium services like RACs or any audit-related services. Consider any additional ‘upsell’ product offers carefully when you are filing income taxes. Understand any possible short-term ‘interest rate’ or issues associated with repayment of the tax preparation service fees if your anticipated refund is delayed or withheld by the Internal Revenue Service due to processing issues, reviews, or prior year offsets like back taxes, child support payments, or outstanding student loan payments.
Other online references that discuss RACs in 2013:
Refund Anticipation Checks: The New Refund Anticipation Loan …
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