Putting Your Tax Return to WorkTuesday, March 06, 2012

CredAbility cautions against Refund Anticipation Loans.

ATLANTA GA. -- Chances are you are going to get a refund when you file your 2011 income tax return. While the opportunity to borrow against your anticipated refund may be tempting, CredAbility cautions against taking a loan against any refund or rebate you expect to receive.

A Refund Anticipation Loan (RAL) is a high-cost loan secured by your pending refund. They typically range from 7-14 days and interest rates can range from 40 to 500 percent or more. “Refund Anticipation Loans are almost never good for consumers,” said Mechel Glass, director of education for CredAbility. “They come with extremely high fees and can leave consumers with significant debt if their refund is lower than expected.”

There are alternatives to Refund Anticipation Loans that can help consumers get their refund quickly without going into debt. Taxpayers can prepare and electronically file their 2011 tax returns for free via www.irs.gov if their adjusted gross income is $57,000 or less. Free tax preparation help and filing is also available for low- to moderate-income consumers through the Volunteer Income Tax Assistance (VITA) program and AARP's TaxAide (www.aarp.org/taxaide). To locate the nearest VITA site, call 800.829.1040. You can find a TaxAide site by typing your zip code into the website.

When you do receive your refund and your tax rebate, CredAbility suggests putting the money to good use. "Tax refunds provide a great opportunity for consumers to take control of their finances," said Glass. "If used wisely, they can help eliminate debt, serve as the foundation for a college education, or help fund the dream of homeownership."

Here are some ways to give your tax refund a purpose:

Contribute to or start an emergency fund. In these challenging economic times, it is more important than ever to have money set aside in the event of a job loss or other life-changing event. CredAbility recommends that you have $1,000 in an emergency savings fund, as well as savings to cover three to six months of living expenses in case of a job loss. Your tax refund is a great way to jump start this account. By placing the cash in a separate savings account or short-term CD, you're going to be less likely to use it, and it will be there to help pay your mortgage, rent, and other living expenses in the event of an emergency.

Service the car and tackle other things on your to-do list. If you've been putting off getting an oil change, cleaning your gutters or fixing the leaky roof - now is the time to cross those things off your list. Using your tax refund to maintain your expensive possessions now could save you money in the future.

If you already have an emergency fund and your to-do list is up-to-date, here are some other wise ways to put your refund to work:

Pay down credit cards or other high interest loans. Credit card debt is simply an unsecured loan. If you can't pay them off completely, make an extra payment or commit to paying more than the minimum each month. People struggling to make ends meet in these difficult times should make sure to utilize their tax refunds to pay for essential items, such as food and gas, before using a credit card to pay for these items.
Continue making regular mortgage payments. Many people are juggling a variety of debt, but it's a priority to make your mortgage payment before paying other bills. Falling behind on your mortgage payment will put your house at risk, especially in states where lenders don't need to utilize the court system to foreclose on a home. A tax refund can help you continue making these payments.
Invest in retirement. Retirement is expensive, and most consumers believe they are behind in saving adequately to ensure a comfortable retirement. Whether it's in your 401(k), IRA or Roth IRA, investing your tax refund now will help provide financial security after you retire. The sooner you start saving, the more time your money has to grow. Make retirement savings a high priority by setting goals, devising a plan and sticking to it.
Open a 529 College Savings Plan. A college education isn't getting any cheaper. With 529 College Savings Plans, deposits made now can be withdrawn tax-free when used for higher education. Plus, some plans come with tax benefits.

Review your exemptions for next year. While getting a tax refund is nice, do you really want to lend your money to the government all year instead of putting it to work for you? Consider reviewing your exemptions so less is deducted from your paycheck. Then make arrangements for the extra money to be deposited into a savings account to help pay bills or build up your savings cushion.

If you didn’t get a tax refund this year because it was withheld to repay certain types of debt, consider CredAbility, which provides confidential budget counseling, money management education, debt management programs and other services to help consumers. Contact CredAbility at 800.251.2227 or online at www.CredAbility.org.