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Timely Tips for Tax Season
FDIC Consumer News doesn't give tax advice, but we do occasionally have suggestions for you to consider or discuss with your tax advisor. Here is our latest collection of tips.
Have your tax refund direct deposited into your bank account. "The benefits include receiving your tax refund faster and knowing that your refund check will be safe and not lost or stolen," said Luke W. Reynolds, an FDIC Community Affairs Specialist. "Direct deposit also provides an easy way to save part of your tax refund, because as they say, 'what you can't see you can't spend.'" Taxpayers also have the flexibility to directly deposit their tax refund in up to three different accounts at three different U.S. financial institutions.
If you need cash and you can't wait for your tax refund, carefully consider your options and costs. In particular, "refund anticipation loans" arranged by tax preparers for people who file their returns electronically, will get you cash in just a day or two, and the loan will be paid back with your tax refund, but the costs are comparable to very high interest rates. Also remember that people who file their returns electronically using the IRS "e-file" service can receive refunds in two weeks or less.
Make good use of your refund. Consider paying down or paying off your loans and other bills, starting with the ones that charge the highest interest rates on unpaid balances. Start or add to an existing savings account. Or, fund a retirement account or college savings plan.
You can pay your tax bill using your credit or debit card but beware of the costs. Your financial institution may offer small incentives — such as miles, points, cash back or other rewards for using your card — but factor in the processing fee, which can be substantial, especially for credit cards. Other costs also may apply, such as interest if you don't pay your card balance in full by the due date, and overdraft fees if your debit card withdrawal exceeds your account balance.
You can have your payment withdrawn electronically from your bank account. This service adds speed and convenience. You can also file your tax return early and set the payment withdrawal for a specific date, such as April 15. Ask your financial institution about any fees it may impose. But make sure you have enough funds in your account when the payment is to be made.
If you need to borrow money to pay your taxes, you have several choices but all come with fees and costs. The cheapest way to pay your tax bill is to tap your bank account. But if you must borrow the money, options include bank loans, an IRS monthly installment plan and your credit card. "Using a home equity line of credit may be an option, but remember that you could lose your home if you are unable to make the payments," added Reynolds.
Take advantage of free tax preparation services. One IRS program that the FDIC is helping to promote is the Volunteer Income Tax Assistance (VITA) program, which provides free tax-preparation help to low- and moderate-income taxpayers at various locations. "Some VITA sites even have representatives from banks or other organizations who can assist in other ways, including opening a bank account or obtaining a credit report," said Cathy Davis, an FDIC Community Affairs Specialist and a VITA tax-preparation volunteer.
Another IRS program is "Free File," which allows taxpayers who earn $54,000 or less (for returns to be filed during 2008) to prepare and file their federal taxes for free through the IRS Web site.
For more help or information, go to the IRS Web site at www.irs.gov or consult a tax advisor.
Last Updated 11/08/2007