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HSFPP Weekly Update # 178—Is Paid Tax Preparation and a Rapid Refund Worthwhile?

Message from Bob and Charles: With tax season approaching, this is a good time for parents and educators to teach teens about the income tax; teens who work part-time or who had summer jobs can fill out their own tax returns with some guidance from parents or teachers. They should know what information is on their W-4 and how tax forms are filled out. It is also important for parents and educators to teach teens that some things in life are inevitable, taxes being one of them, and that not paying taxes can get them into big trouble. It can damage their credit rating and can result in fines or even jail time. For this reason, if for no other, it is simply not worth cheating on taxes.

Because cheating on taxes is an ethical, as well as legal issue, you might want to revisit ethical issues covered in previous updates; cheating by students and teachers, for instance.

Previous updates featuring stories on ethical issues include:

Update #132 - Cheating - 12 September 2005
Update #129 - Credit History, Personal Behavior, and Employment - 16 May 2005
Update #126 - Revisiting File Sharing - 25 April 2005
Update #66 - Music File Sharing - 22 September 2003
Update #10 - Retirement Plans Continued: The Enron Situation - 14 January 2002
Update #9 - Retirement Plans - 8 January 2002

 

Notes to Educators:

Have students read this week’s article In the New$...; then ask them the discussion questions below. We also provide writing activities for history and English classes.

 

Web Site Pick of the Week:
http://www.irs.gov/
The Internal Revenue Service Web site provides a wealth of information, including what’s new, questions and answers, forms, and how to file online.

 

In the New$.... Income Taxes and Refund Anticipation Loans

by Charlie Sewell, Junior in Communications, University of Kentucky

Teenagers’ taxes are almost always relatively simple; most teens can use the short form or file their tax return electronically for a rapid refund. For most teens, a paid tax preparer is unnecessary and a needless expense.

Personally, the farthest I’ve ever trotted in the waters of taxes is handing my mom my W-2 form. I’ve never filed my own taxes, but have just given all of the necessary paperwork for this year’s taxes to my mother. I guess I can’t say my mom doesn’t love me, considering that she is doing what I’m unwilling to do – filing my tax return. But eventually I hope to have a good paying job and will have to file my taxes just like everyone else. 

If you do not make a lot of money and you qualify to use IRS Form 1040EZ or 1040A, you might want to file electronically so you can get your refund back quickly. In order to do this, you must have a bank or credit union account. They also will file them electronically at no cost to you.  Another alternative is to request the help of the Volunteer Income Tax Assistance (VITA), an IRS-sponsored group that has been organized to help low- and moderate-income taxpayers.

Unfortunately, nothing comes free. Those who decide to use a paid tax preparer will not only pay to have their taxes done, but might have to pay high fees to get their refund quickly. These fees are actually Refund Anticipation Loans (RALs), high cost loans that are secured by and repaid directly from the proceeds of a consumer’s tax refund from the Internal Revenue Service (IRS). About 12 million taxpayers took out RALs in 2004, costing them over $1 billion dollars in loan fees.

The cost to prepare standard federal and state tax forms can be very similar from one preparer to another, but the rapid refund fees can be two to three times as much from one service to another. Shop around not only for the lowest cost tax preparation, but also the lowest cost to file electronically. Remember how hard you worked to make your money and don’t throw it away; making a few phone calls to get price comparisons will save you money, while still allowing you to receive a quick refund.

Source: National Consumer Law Center http://www.consumerfed.org/pdfs/2006_RAL_report.pdf

 

Discussion Questions:

1.)  Do you file your own taxes? If not, who does them for you?

 

2.)  At what age do you think you’ll begin filing your own taxes?

 

3.)  Which option would you use to file your taxes? Why?

 

4.)  In what ways are RALs problematic in tax filing/preparation?

 

Follow-up Activity:

Economics/Business class: Compare different tax filing preparers for a 1040EZ, for both federal and state taxes. Look at cost for preparing, cost for electronically filing, and cost for instant loan/refund. After you’ve figured the total cost for one year, figure out how much it would add up to after 20 years, considering Annual Percentage Rate (APR) on loans.

Annual Percentage Rate	Tax Preparation	Electronic Filing	Instant Loan/Refund	Total for 20 Years
10%
12%
14%
18%

Following is a calculator that you can use with this activity:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

 

History / Social Studies class: Research the history of taxes in the U.S. and write a short essay on the subject. Areas to be considered include: the Founding Fathers’ intentions on taxes and tax collection; various types of taxes; how taxes have changed over the years; how attitudes toward taxes have changed; when the income tax began and what its effect has been; effect on married couples and those with children; tax fairness based on income (regressive vs. progressive taxes); Social Security tax; tax exemptions; complexity of taxes and tax law; debate over a flat tax; and what the future might hold.

English class: Write a research paper on the fairness of taxes. Be sure to include various sides on all issues involved and weigh the evidence. The paper should be three pages plus endnotes and bibliography with at least three sources. Only one encyclopedia may be used (Americana preferred). At least one source must be current (no more than one year old).

 

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of the HSFPP weekly financial updates and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP and the weekly updates meet Kentucky core concepts. The Web site and weekly updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page.