Are Prepaid Cards a Smart Way to Get Your Tax Refund?

Credit.com

If you use an online tax preparation service, you’ll no doubt see ads promoting a prepaid card as a “fast and secure” way to get your refund. One of my colleagues said that as she prepared her taxes online, the promotions for a particular issuer’s prepaid card popped up numerous times.

And in fact, it’s not just the tax preparation services that are promoting these cards as a great way to get your refund. Prepaid card issuers such as RushCard, AccountNow and others are touting the benefits of this option.  For example, the Ready Debit prepaid Visa card page says:

File your tax return online using ezTaxReturn and have your tax refund available on your new READYdebit Prepaid Visa® Card…Quick and Easy…Safer & More Secure…With Direct Deposit of your tax refund — no more lost or stolen checks!

There are pros and cons to prepaid cards and one important question is what kinds of fees you’ll be charged.  I checked the websites of several of the major tax preparation sites to find out what they are offering. I’ve listed only the main fees here, there may be other miscellaneous fees, but they are usually fairly easy to avoid.

H&R Block’s Emerald Prepaid MasterCard: No monthly fees except for a $2.50/month for inactivity after 3 months; $2.50 ATM fee; cash reload at retail locations, up to $4.95.

TurboTax Prepaid Visa Card: No monthly fee with $50 balance, otherwise $5.95/month;  first ATM withdrawal free, $2.50 thereafter; load card free with direct deposit, otherwise up to $4.95 with MoneyPak (first time fee refunded).

Jackson Hewitt smartcard Visa Prepaid Card: Non-personalized card monthly fee $5.95; ATM fee $2.50. (Once you load money on the card you receive a personalized card. )

TaxAct no longer has its own card, but instead has partnered with the PayPower Card: Monthly fee $5.95/month; ATM fee $1.95 (domestic); load money free with direct deposit, retail location loan fee up to $3.95.

Only the PayPower Card website made finding a fee schedule super easy. H&R Block’s is in a cardholder agreement linked from the main page; I couldn’t find a clear fee scheduled for TurboTax’s card; and Jackson Hewitt linked to theirs in the truly miniscule fine print, but it only covered the non-personalized card. I could not find a fee schedule for the personalized card.

As far as safety is concerned, cardholders’ funds may not be protected with FDIC insurance as they would be if those funds are deposited into a bank account, and the protection that is offered in the case of loss or theft of a prepaid card is not as strong as it would be with a credit card.

For some taxpayers, though, prepaid cards may be a decent option. An Urban Institute study found prepaid cards to be “promising” for the unbanked or underbanked who may not have bank accounts into which their refunds can be deposited. In those cases, a prepaid card may be safer (and certainly faster) than waiting for a paper check to arrive.

Watch Out For: Refund Anticipation Checks

For years a big trap for consumers desperate to get their refunds quickly was the Refund Anticipation Loan, a short-term loan with interest rates often in the triple digits. The National Consumer Law Center reported in 2012 that due to settlements with regulators, “the sale of RALs as a widespread industry-wide practice is over.”

But as Kevin Gibson, a New Orleans bankruptcy attorney, recently warned on the Bankruptcy Law Network blog, “reports of the death of refund anticipation loans are greatly exaggerated!”

Instead, some services have shifted their efforts to promoting “refund anticipation checks (RACs).”  The sales pitch is that you don’t have to pay upfront to get professional tax preparation help. You can have the fees deducted from your refund. That’s certainly appealing to someone who may be short on cash and needs their refund ASAP.

The NCLC/CFA 2012 Refund Anticipation Loan Report describes them this way:

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check.  After the refund is deposited, the bank issues the consumer a paper check or prepaid debit card with the RAC proceeds, or direct deposits the refund to the taxpayer’s own account and closes the temporary account.  For taxpayers who can receive direct deposit from the IRS into a bank account or onto a prepaid card, a RAC does not provide any advantage in terms of a faster refund, and the only reason to incur this added expense is to delay payment of tax preparation fees.

An RAC is likely to cost the taxpayer extra and may be pitched in conjunction with the prepaid card. Gibson says that one major preparer charges $24.95 to have the return deposited onto their prepaid debit card, or $54.95 to have a paper check mailed to the taxpayer. The NCLC report said that in 2010 RACs generally cost $30. But allowing your refund to go into someone else’s bank account can be dicey if you are working with a shady preparer.

Last year, a financial planner told me of a young woman who went to a local independent tax preparer to have her taxes done. Not knowing any better, she signed paperwork allowing her refund to go into the preparer’s bank account. She was told she would receive a check from the preparer when her refund came through. Not only did she not get her refund, but the preparer falsified her return, claimed a large refund, pocketed the cash and disappeared. That taxpayer learned a costly lesson and spent several years fighting with the IRS.

The IRS is trying to regulate tax preparers to enforce minimum competency and continuing education standards. But it has hit a roadblock with a ruling from a federal judge that says it lacks the authority to do so. That means you have no choice but to watch out for yourself.  Choose carefully, and ask for references from people you trust. Be especially careful about new independent tax professionals whose background and experience can’t be checked out.

That leads us to a third option:

The Best Option: Direct Deposit

Yes, I have saved the best for last. With this option, the IRS will deposit your funds into the bank account you designate. In fact, you can split your refund among up to three checking or savings accounts, and even purchase savings bonds with some of it. That means you can use some of your refund to splurge, some to pay off any pesky holiday debt still hanging around, and some for long-term savings.

By the way, even though the IRS got off to a later start than usual, it says it will issue refunds to more taxpayers in as few as 10 days this year, thanks to technological improvements. And more than 90 percent of refunds will be made within 21 days.

“Keep it simple, I say,” William J. Purdy III, a real estate and tax attorney with the Law Offices of Simmons & Purdy. “File your return as fast as you can (so you) get your refund from Uncle Sam. All of the other routes impose some toll charge in exchange for getting you what you’re entitled to receive for free. The better the offer the more unbelievable and the more the taxpayer is likely to end up overpaying to get their refund quickly.”


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