To Save the Most Money — File Your Tax Return As Early As Possible

The sooner you file your taxes, the sooner you’ll get that refund check. And that means you can pay down other debt with that money, which can mean BIG SAVINGS in interest you won’t have to pay.

Say you have one of those store credit cards that charges high interest. (Are there any that don’t?) The HHGregg credit card, for example,  has an annual interest rate of just under 30 percent. To figure out the approximate monthly rate Dividing by 12 months, we could estimate a monthly interest rate for this card to be 2.5 percent. Now, let’s say you owe $1,000 on that HHGregg Card. Even disregarding the compound interest you’d be paying–the interest on the interest–your MONTHLY interest would be about $25. So if you get a $1,000 tax refund and use it to pay off the $1,000 on your HHGregg card on February 15 instead of April 15–2 months earlier than if you filed your taxes at the last minute–you’d save 50 bucks. So if you receive a $4000 tax refund and use it to pay off $4,000 on your HHGregg card 2 months early, you’d save you 200 bucks! That’s money you’ll save just for paying off a bill 2 months early–which you’d be able to do simply because you filed your taxes before the deadline and got your refund that much sooner.

Loan Anticipation Loans Cost You Money

A word of warning: don’t get suckered into applying for a refund anticipation load like those offered by H&R Block, Jackson Hewitt, or lots of other similar companies. Refund anticipation loans will cost you money–because they charge SUBSTANTIAL FEES for the benefit of getting your refund sooner than you would normally. According to a Businessweek article on H&R Block, the average 2010 customer paid an annualized interest rate on their loan of 54 PERCENT!

You should reject refund anticipation loan on a matter of principal, if nothing else. How can any business have the nerve to charge interest rates this high? Not to mention, the IRS is typically pretty efficient at getting tax refunds out to everyone–especially those who opt for direct deposit of their refund. So it’s really not worth losing a huge chuck of your refund just to get it a few days (or even a couple of weeks) earlier.

If You’re Not Sure If You’re Due a Tax Refund— Complete Your Return As Soon As Possible

If you discover you owe money on your taxes, the IRS requires that you submit payment when taxes are due. Failure to pay may cost your interest and penalties. So if you’re not sure if you’ll be getting a refund or owing money on your taxes, the safest thing to do is complete your tax return as soon as possible. If you complete your tax return 2 months before it’s due, you’ll have two months to plan how to pay it. And if it turns out you’re getting a refund, you can get that money back in your pocket sooner and use it to pay off debt, as discussed earlier. Doing your taxes early is a win-win, whether you owe money or are due a refund.

Always consult a tax professional before filing your taxes, if you have any questions. I do not claim to be a licensed tax professional, so none of what I am saying here should be taken as professional advice. But I do think that a lot of what I’ve said here makes a lot of sense–and I suspect many of you will agree.