Now that I’m dried off from testing out the Sykes Cement Shoes (yes, they do sink a blogger), it’s back to business. Channel 12 gives us a story on a state warning about tax refund anticipation loans. I do agree with the state that these are very bad ideas, and for the reason why they state – it’s borrowing your own money at an exhorbitant interest rate. However, there’s a point they don’t bring up. In order to get that massive “refund”, you were borrowing your own money to the state and the feds at no interest rate. What are you doing giving the state so much tax money through the course of the year that you have a massive “refund” coming? That’s money that you could have invested over the course of the year, and instead of having less purchasing power from it by taking it as a late lump sum, you could have either spent it as it came in and had more stuff for your money, or done the really-smart thing, invested it and actually made some money.
Do note that I’m not saying take withholding down to zero (though I would prefer that, with everybody writing a quarterly check like those that earn most of their income from sources where withholding doesn’t happen, just to see how much money is going out the door to government – it’s FAR more than the property taxes, almost 47.5 times more as of 2004, and that’s just the state income tax), because that would, without the estimated quarterly tax payments, get you in a heap of trouble. I do recommend asking your tax advisor a different question than the usual maximize-refund one; “How do I maximize my take-home pay without getting whacked with penalities?”
Many of the Refund Anticipation Loans are due to credits like the earned income credit. The tax filer does not have any taxes withheld but files to receive the credits. Otherwise known as welfare.