Sometimes it’s hard to wait for a thousand dollars, isn’t it?
This truth is especially relevant during tax season as millions of us prepare our taxes in hopes of getting a nice refund in a few weeks or months.
For those who can’t wait, tax preparers like H&R Block, Liberty Tax, and Jackson Hewitt offer no-interest tax refund advances that promise to give you up to $3,250 in 24 hours’ time. The best part is that each of these companies claims their advances are free.
Are these advances too good to be true? We’re going to answer that question by guiding you through how tax refunds advances work, how they came into being, why companies offer them and how H&R Block, Liberty Tax and Jackson Hewitt go about getting you your refund.
Along the way, we’ll give you expert tips on the hidden costs you’ll encounter when applying for a refund advance.
How Do Tax Refund Advances Work?
The idea is simple. Go to a tax preparer’s office, provide them with the necessary documents and they process your return. In most cases, you’ll get your refund advance within 24 hours.
There are a few minor quirks to the process. First, your tax situation has to qualify, which we’ll talk about in a few minutes. Second, the money comes to you in the form of a prepaid card or a direct deposit.
Taken at face value, refund advances seem like the perfect financial product. However, a quick overview of the history of why these advances exist will help you see that there’s more going on than you realize.
Why Tax Refund Advances Exist
A few years ago, the government passed a law called the PATH Act. This law said that taxpayers who were eligible for the Earned Income Tax Credit (EITC) had to wait until February 15 to get their tax returns.
EITC taxpayers are those who have incomes that range from around $15,000 to $54,000 depending on whether they’re single or married and how many kids they have.
In other words, these are families who have lower incomes and need their tax refunds as soon as possible, Liberty Tax’s Regional Director of Operations Brian Ashcraft told us in an interview.
Liberty Tax’s research shows that most of these individuals or families spend their entire refund within weeks of receiving it. Another 11% spend that money within hours.
“We also noted that consumers spend the money on groceries, rent, and bills current and past due,“ Ashcraft said. “When you’re dealing with that, time is of the essence.”
The bottom line is that tax refund advances are designed specifically for consumers who are in a jam. You’ve got late payments and bills are piling up. You’ve got to buy groceries. You’re trying to make ends meet.
Refund advances are intentionally made to appeal to you because they give you quick cash that you can use to steady your finances.
Liberty Tax’s Explanation of How They Offer “Free” Tax Refund Advances
Like you, I was wondering if these tax refund advances were too good to be true. After learning about why they were created, I realized that refund advances target those in need. And, when people are in need, they tend to take money first and ask questions later.
When I asked Ashcraft how the company could offer such a great service for free, he said the company moved some money around to free up cash to pay for the fees their bank was charging them for the advances.
“The bank charges us and we pay that fee,” Brian told us. “We had to reallocate some of our marketing spending to make this product available and to promote this product.”
I came away from our interview believing there was some way that Liberty Tax, H&R Block, and Jackson Hewitt were making money off this program, but it was early in my research and I didn’t have answers.
When I talked with Kyle Walters, a CFP with Atlas Wealth Advisors, he too expressed his skepticism about the tax refund advance programs.
“They’re saying they want to give you a tax refund advance for free, but it doesn’t make sense how they win,” he said. “If you don’t see any way the company could potentially win, then you’re missing something.”
When I made a round of calls to the three companies mentioned earlier, I found what I and most consumers are missing: a hidden cost.
The Hidden Costs of H&R Block, Liberty Tax & Jackson Hewitt’s Tax Refund Advances
I use the phrase “hidden costs” to describe something that you won’t see on any of the three company’s refund advance pages: tax preparation fees.
You aren’t eligible for a refund advance if you file online; you have to go into an office to obtain it. And, when you go into the office, you pay fees.
I wanted to know how much those fees were, so I called H&R Block, Liberty Tax, and Jackson Hewitt offices in my city, Jacksonville, FL.
The following three sections detail the conversations I had with customer service representatives. Each heading lists the tax preparer and the fee I was quoted for them to prepare my free tax refund advance.
H&R Block: $120
H&R Block’s tax refund advance program is called Refund Advance, and the advance is disbursed to you on an H&R Block Emerald Prepaid MasterCard in amounts of $500, $700, $1,250 or $3,000.
I made a call to H&R Block’s customer service line to find out how much an office visit would be.
They asked me three questions. The first two questions were feelers for whether or not I had assets (home, rental properties, stock) or if I was self-employed. If I answered yes to either of those questions, I would’ve been quoted a higher price for my office visit.
However, I answered no because I wanted to see how much it would cost for an average person with one W-2.
I was asked if I was claiming any dependents and I said yes, as would someone who is getting the Earned Income Tax Credit. Their quote to process my return? $120.
Liberty Tax: $215
Liberty Tax calls their tax refund advance the Easy Advance and give you $500, $800, $1,300 or $3,250. Unlike H&R Block, they’ll give you your return via direct deposit, a prepaid card or by a check you can pick up from the office.
I called a local Liberty Tax just like I did when I dug up pricing for H&R Block. The representative on the phone also asked a series of questions: Was I self-employed? Did I have just one W-2? Did I have dependents?
After answering yes to the W-2 and dependents questions, I was told that, for someone without dependents and just one W-2, the cost to do my taxes would be $215. If I was claiming the Earned Income Tax Credit and I had dependents, I would be charged around $400.
Jackson Hewitt: $300 - $400
Jackson Hewitt’s Express Refund Advance program will advance you up to $1,300. You have the choice of putting your advance on an American Express Serve prepaid card ($100, $200, $500, $750, $1,000 or $3,200), or you can have the advance deposited directly into a checking account.
Like the other two tax companies, they require you to do your return in store to get the advance.
We called a Jackson Hewitt office to get an estimate on tax returns. For someone with one W-2 and a child, we were quoted a cost of $300 - $400, mainly because there were added charges for the additional paperwork the EITC required.
When we asked how long it would take to get the money on the AmEx card, they said within the day.
When I asked about the direct deposit, they said up to five days, a direct contradiction of the Jackson Hewitt website, which says the direct deposit is processed within one business day.
We Believe Tax Refund Advances Don’t Benefit Consumers
Someone with a single W-2 can do their taxes for free on any of the four popular tax software websites. You can even do it for free on H&R Block’s site.
Basically, the three tax preparers we mentioned above are charging you at least $120 for something you could do for free; this is the hidden cost of tax refund advances.
In our opinion, forcing customers to come into an office and pay for a tax return in order to get their refund advance does not benefit the consumer.
It’s Worth It to Wait for Your Tax Refund
Despite the “hidden fees” of tax refund advances, we know that some people find themselves in really difficult financial positions at this time of the year. They’re coming off big expenses from Christmas and they’re trying really hard to make ends meet.
If you’re absolutely forced to get a tax refund advance, go with H&R Block. Based on what they told us over the phone, you can expect to pay around $120 if you’ve got a single W-2 and dependents.
If you aren’t in dire straits and you just like the idea of getting money up-front for free, avoid refund advances, go to a site where you can file for free like Credit Karma Tax or TaxAct and wait for your return to show up.
» For Further Reading: A Beginner’s Guide to Filing Your Taxes for Free