Tax refunds can be a wonderful financial windfall, says Debra Pankow, North Dakota State University Extension Service family economics specialist.

“Unfortunately, too many people receive substantially less than they are due because they take out expensive loans to get an instant refund,” she says. “Refund anticipation loans (RALs) are high-cost, short-term loans secured by a taxpayer's expected tax refund.”

Research shows that many consumers are unaware that RALs are loans and do not know of their high cost. Usually, RALs last about 10 days, which is about the time it takes to receive a refund from an electronically filed tax return. High fees for these short-term loans generally translate into triple-digit annualized interest rates.

Some of the major ""players"" in the RAL industry include large national tax preparation firms, finance companies and high-cost fringe financial providers, such as payday lenders, check cashers and rent-to-own stores.

If you really need your tax refund money immediately and can't wait for your refund check, there are several cheaper alternatives.

“Other options for quick cash include short-term loans from family or friends, credit union loans and credit card cash advances,” Pankow says. “If you e-file your return, you should have your money in two weeks or less. If you file a paper return, use the direct- deposit option to your bank account. The turn-around time using this option often is less than a month.”

While you're waiting for your tax refund, make plans to use it wisely. Here are some suggestions to increase your financial health:

• Pay off high-cost debt, such as credit card bills.
• Start or replenish an emergency fund of three to six months worth of expenses.
• Start or increase deposits to tax-deferred employer savings, such as a 401(k) plan, and use your refund to offset the reduced take-home pay that will result from making increased plan contributions.
• Fund a traditional or Roth individual retirement account.
• Start or increase deposits to a 529-college savings plan for your children or grandchildren.
• Refinance your mortgage and use the refund to pay necessary closing costs.
• Make extra principal payments on your mortgage to shorten its term and lower the total cost.
• Invest in home improvements, such as landscaping and kitchen upgrades, that have a high payback.
• Purchase necessary business equipment, such as a computer, if you are self-employed.
• Buy a needed ""big ticket"" item, such furniture or a major appliance, for cash instead of using a credit card.
• Purchase a few hours of a certified financial planner's time to get advice and a financial checkup.
• Donate all or part of your refund to support a worthwhile charity and receive a 2007 tax write-off.

“There's one more item that taxpayers should consider doing,” Pankow says. “Change your tax withholding to increase your take-home pay now and lend less money interest-free to the federal government. To do this, contact your employer's payroll office and file a new W-4 withholding form.”

Beginning in 2007, the IRS will allow taxpayers to direct deposit tax refunds in up to three different accounts, such as checking and/or savings, at up to three different U.S. financial institutions, but you must complete form 8888 to do it.

NDSU Agriculture Communication