It’s that time of year again; W-2s are showing up in mailboxes across the country signaling people to start preparing to file their 2012 taxes. Like in years past, tax preparers are already bombarding the public with reminders about the impending tax season. Unlike previous years, however, there are a number of big changes in this year’s tax landscape.
First and foremost, 2012 is likely the last year for refund anticipation loans (RALs). As discussed in previous blogs, RALs are short-term, high-interest-rate bank loans sold through tax preparation sites, such as H&R Block or Jackson Hewitt. Although marketed as “instant refunds,” RALs are actually extremely high-cost bank loans that last 7-14 days until the actual Internal Revenue Service (IRS) refund repays the loan. All fees are deducted from the final RAL amount issued to the taxpayer. If, however, the RAL customer does not receive the expected tax return amount as calculated by the tax preparer, he or she is liable to the lender for the difference. By one estimate, consumers paid approximately $833 million in RAL fees in 2006 and $740 million in 2007.
The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. Yet, most taxpayers could have their refund in two weeks or less if they file electronically on their own. Fortunately, after this 2011 tax season, RALs will no longer be offered. In December of last year the Federal Deposit Insurance Corporation (FDIC) entered into a settlement agreement with Kentucky-based Republic Bankcorp Inc., the last bank in the country providing funding for RALs for tax preparation companies, which will prohibit the bank from continuing to fund them after this year.
While the demise of RALs was slow and painful, Jackson Hewitt, the sole tax preparer that will be offering RALs this tax season, is making sure that RALs have one last party on their way out. Jackson Hewitt’s flashy TV commercials ads are trying to turn tax time into party time. In particular, Jackson Hewitt, as the only player in the market, is trying to capitalize on this last tax season as much as possible. In addition to its traditional tax preparation and RAL services, Jackson Hewitt is also partnering with Wal-Mart. Wal-Mart recently entered the banking game by providing check cashing services and also began offering a prepaid card, the MoneyCard. Through its partnership with Jackson Hewitt, it will also provide so-called “free” tax preparation.
Over 3,000 Wal-Mart’s will offer free 1040 EZ assisted filing, and customers will be given their tax refunds in the form of Wal-Mart cash cards. Most people, however, cannot use the 1040 EZ form. The 1040 EZ form does not cover anyone who wants to itemize deductions (usually homeowners) or anyone claiming student loan interest, health care credits, the earned income tax credit (EITC), child tax credits (CTC), or retirement credits. Because a 1040 EZ filing cannot be used in connection with refunds, households that use the 1040 EZ form to have their taxes prepared for free will be forgoing things like the EITC, which is the largest anti-poverty program in the United States. If a household elects to claim the credit, then Wal-Mart’s tax preparation service will not actually be free.
Additionally, even for those that do have their taxes prepared for free, the cards on which their refunds are paid come with hidden fees. Fees for Wal-Mart’s Cash Card include $2 to withdraw cash from an ATM, $1 to check the balance, and $3 if $1,000 isn’t added to the card in a given month.
Tax time is a critical time helping for low- and middle-income families to save. Tax filers who are eligible for EITC, CTC, and other credits can receive free tax preparation by going to a Volunteer Income Tax Assistance (VITA) site and getting their tax refunds for free. Additionally, VITA sites will help these households file electronically thereby allowing them to receive their refunds within days without having to rely on predatory products such as RALs. With such savings, low- and middle-income families can open bank accounts, possibly through a Bank On program, which provides low-income families with low-cost accounts at mainstream banks and financial institutions, thereby launching them onto the path of long-term financial stability.
So yes, tax time can be party time, but just don’t invite Jackson Hewitt to the party.
This blog post was coauthored by Alison Terkel.