written by A.T. "Al" Benelli, CFP, FIC |  

You’ve probably heard the pitches for “refund anticipation checks” or “quick tax loans.” The official name is refund anticipation loans, or RALs. They’re marketed primarily to cash-poor taxpayers who use their tax refunds as a piggy bank.

Do they make sense? According to the Financial Planning Association in cooperation with the Consumer Federation of America RAL loans get lumped into the same basket with their more notorious cousin, payday loans.

In 2007, the National Consumer Law Center reported that RALs cost the average borrower from about $30 to more than $125 in loan fees. Some tax preparers also charge separate fees on top of those amounts for the “application.” In their study the effective annual interest rate (APR) for a RAL can range from about 40 percent to over 500 percent, and if application fees are charged and included in the calculation, the effective APRs range from about 57 percent to over 1,100 percent.

In January, the California attorney general reached a $4.85 million settlement with H&R Block, funneling that money to the state’s customers who took out those loans between 2001 and 2008 and prohibiting the tax giant from marketing refund anticipation loans as early tax refunds . All this aside, the real point is that it’s important for individuals to plan their finances and tax strategy so they don’t have to be desperate for a tax refund in any amount. If you’re working with a tax advisor or a financial planning professional, they’ll tell you that the best way to put cash in your hand is through tax planning, not overpayment of tax so you can get a check later.

It’s been said that tax refunds are really interest-free loans to the government, and it’s true. The benefit of working with a qualified tax professional or a financial planner is that they might have more incentive to lead you in the direction of sensible tax strategies than a tax preparation firm that offers such loans. Why would any firm offer smart tax advice when it might threaten such a huge revenue stream? Want to put extra money in your pocket all year round, not just at tax time? Consider the following steps:

Do some real tax planning: A CPA or tax attorney can help you devise a strategy so you and Uncle Sam don’t owe each other anything at tax time. Smart withholding and legal deductions create tax savings.

Restructure your spending: A financial planner can give you some critical advice in building a budget that fits you and your income and spending picture in a way that will prevent a panicky search for money around tax time.

Make smart choices for that money: Quit thinking about your refund as an excuse for a trip to the mall.

Why not use an unexpected tax refund to fund an IRA or some other savings or investment vehicle?

If you finish your taxes early enough you might be able to deposit that overage directly in those accounts and get a leg up on your savings and investment...

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