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What to Know Before You Sign Up for a Payday Advance Program

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At a time when the economy is booming and yet, 46% of U.S. adults still say they can’t cover a $400 emergency, it’s clear many Americans are living paycheck to paycheck. In the past, when money was tight and credit cards were maxed out, people could turn to payday lenders and pawn shops for quick access to cash, often paying exorbitant fees in the process.

Now, several companies have rolled out new services that let workers access their paycheck early through mobile banking apps in order to make ends meet. These services can provide much-needed relief to cash-strapped workers. But we wanted to take a closer look at what they have to offer and whether or not they’re the best option for fast cash.

In late 2017, Walmart announced a new partnership with two Silicon Valley start-ups aimed at giving 1.4 million workers access to financial planning tools.

The first app Walmart workers can access for now is called Even, which, similar to apps like Instant and Earnin, allows users to be paid early for hours they’ve worked.

With Instant, you connect the app with a card given to you by your employer. Once verified you can receive your daily tips and wages, deposited straight to your Instant account, which you can use to check your balance, use ATMs, review wages, and even transfer money to another bank account. The only fee is an easy-to-avoid, 90-day inactivity fee.

Similarly, Earnin allows access to up to $100 per day of your earned pay and works on a tip basis with no fees or interest. You simply connect your bank and employment information, and then you can choose how much of your paycheck to deposit to your bank account, and that amount is debited back when payday arrives.

In Walmart’s deal with Even, workers can use Even’s “instapay” option to receive a portion of the wages they earned before the scheduled paycheck (within the typical two-week pay period) up to eight times per year for free. If your employer doesn’t cover the cost of the app, it’s $2.99 per month after a free 60-day trial, and if you subscribe to Even Plus, there are additional fees that are dependent on what your employer covers for you. Walmart employees monthly costs are covered by the company and they can take advances on hours they’ve already worked before the two-week pay period is over.

Walmart is certainly one of the biggest retailers to announce such an offering, but it isn’t the first. Instant has clients across the U.S. and Canada, including McDonald’s, Outback Steakhouse, and Dunkin’ Donuts, according to a company spokesman.

José Alcoff, director of the Stop the Debt Trap coalition at Americans for Financial Reform, says there are many employer-based loan and paycheck advance programs across the country, many of them offering the service at no interest. Although it’s a nice gesture for workers who are living paycheck to paycheck, it’s not a long-lasting solution for chronic financial insecurity, he warns.

“A payday advance program may or may not be a responsible lending solution, but it is not a solution to poverty and to the kinds of financial crunch that a lot of low-income workers have on a daily basis,” Alcoff said.

An alternative to payday loans and overdraft fees

A payroll advance program can be a good alternative to higher-cost options like payday loans or title loans that provide small-dollar loans. Small-dollar loans are often the best option to help manage financial gaps or unexpected expenses, says Dennis Shaul, CEO of the Community Financial Services Association of America, a Virginia-based organization that represents nonbank lenders and service providers.

Payday loans from a store, bank or website are packaged as two-week, flat-fee products but in reality, have unaffordable lump-sum repayment requirements, according to The Pew Charitable Trust’s “Payday Lending in America” series.

According to Pew, 12 million American adults used payday loans in 2010, with the average borrower taking out eight loans of $375 each and spending $520 on interest. The borrower is actually being indebted for five months out of the year.
The troubling thing about payday loans is that for a product that can so quickly become a debt trap, the reasons people use them are typically to cover day-to-day expenses.

According to Pew, 69% of borrowers use their payday loans for everyday expenses like food, utilities and rent, and 16% for unexpected car and medical expenses.

Companies offering payday advances seek to help their employees avoid paying interest on payday loans.

Other benefits for employees who have access to payroll advance apps include tools to help budget and plan ahead to pay bills, which can help people avoid late fees and overdrafts from their bank account. Employees, especially in occupations like the restaurant industry where pay varies depending on the season and shift, also would know in real time how much money they have to spend.

The risks of using a payday advance program

While it may seem like the easiest way to manage your financial stress, getting an advance on your pay could potentially push you into a cycle of debt if you’re not careful.

“Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days,” according to the Consumer Finance Protection Bureau.

While this refers to payday loans, the same principle applies to payday advances. Some companies offer access to a payday advance program as a benefit at no extra cost, but once you go beyond the basic benefit, you could face an additional charge (like the $3 per pay period subscription to Even Plus).

Alcoff says a living wage and full benefits package that allows workers to live with dignity is the only solution to many low-income workers’ financial woes.

“The more workers are stuck in pay loans and to debt-trap loans, the harder it is for them emotionally and their health and their abilities to make ends meet for their children,” he said, “and the more that that comes back to haunt employers, who are often the ones who see lower productivity and more stress in the workplace.”

Any individual interested in their employer’s payday advance programs should read the fine print. For example, look to see if you are relinquishing access to your bank account to your employer.

“Don’t take it for granted that your company has your best interests at heart,” Alcoff said.

 

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How Trump’s Tax Reform Could Impact Your 2017 Taxes

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The U.S. hadn’t passed major tax reform since the Reagan era, but that streak ended when the Trump administration’s Tax Cuts and Jobs Act of 2017 was signed into law in December.

Thanks to corporate tax cuts included in the bill, American businesses have seen billions of dollars worth of savings already. The result for the average taxpayer is less certain and depends on many factors.

“Some will save some, some will lose some,” said Steven H. Osiason, a CPA in Tampa, Fla., and a member of the Florida Institute of CPAs.

Nevertheless, most changes under the new law went into effect Jan. 1, which means workers should consider at least reviewing their tax strategy for 2018 now — or run the risk of underpaying or overpaying their taxes this year.

While tax reform won’t change your 2017 filing much (save for an exemption for major unreimbursed medical expenses), 2018 is a much different story. There are three major differences will affect the majority of Americans when they file their taxes for 2018:

  • The standard deduction has doubled from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly. Because the standard deduction is so much higher, it may make less sense for many taxpayers to itemize their deductions for 2018.
  • Meanwhile, the personal exemption, each $4,050 for you, your spouse and any dependents, has been removed. However, Amy Wang, senior manager for tax policy and advocacy for the American Institute of CPAs, says the new or expanded provisions will counteract the loss of the personal exemption and other cuts.
  • The state and local tax deduction (aka the “SALT” deduction) was not eliminated entirely, meaning you can still deduct your real estate, sales and city and state income taxes if you itemize. However, the bill places a $10,000 limitation on that deduction. Previously, the amount was unlimited.

Check out this quick explainer from MagnifyMoney for a comprehensive look at the tax changes.

Whether you stand to benefit or not from the new bill, Wang says it will simplify taxes for a lot of people.

Even if you haven’t turned in your 2017 taxes, it’s smart to be aware from now of major changes and plan for next year’s tax season.

What to expect from your 2017 taxes

More pay in your pocket. A change in tax brackets, plus the doubling of the standard deduction, could boost your take-home pay this year.

Unless you are a single filer who makes less than $9,525, married filing jointly with an income of less than $19,050 or head of household making less than $13,600, you’ll see a drop in the taxable portion of your income.

What that means now is that you should be seeing a slightly larger paycheck, or you might get a larger return next year, says Wang.

Wang says the IRS required all employers to make changes to their employees tax withholdings by February 2018. While you should be seeing changes, you should compare your most recent pay stub with the IRS withholding calculator.

“It’s important because you want to make sure that you are paying enough taxes,” said Wang.

Tax deductions: Some drop off the list. While the increase of the standard deduction will result in more individuals and couples opting out of itemizing, those who are itemizing will face some serious cuts in what’s available to deduct.

“Those hit hardest are people in high income-tax states because you’re limited to a total deduction on itemizing of $10,000,” said Osiason. “That includes the sum of all your real estate taxes, sales tax and state and city income tax.”

In addition to a new cap on the previously unlimited SALT deductions, the amount you can deduct from your mortgage interest is lowered as well. You can now only deduct the interest on a mortgage that is $750,000 or or less, which is down from $1 million. On the bright side, the former $1 million cap continues to apply to homeowners who took out their mortgages on or before Dec. 15, 2017, as well as mortgage refis completed on or before Dec. 15, 2017, as long as the new mortgage amount does not exceed the amount of debt being refinanced.

Tax reform completely cuts several other deductions, including moving expense deductions (with the exception of active military personnel moving due to military order), tax prep deductions and disaster deductions (unless the damage was due to a federally declared disaster).

Also, the requirements for out-of-pocket medical expense deductions changed. Now, you can only deduct out-of-pocket medical expenses that are 7.5% higher than your adjusted gross income. Previously, that threshold was set at 10%.

Again, the loss of these deductions might sting but not too badly, given the fact that the GOP decided to raise the standard deduction.

Tax credits and more: Child care, others enhanced. One of the most significant changes, and one that helps balance out the loss of the personal exemption for many people, is the doubling of the child tax credit. Having never been adjusted for inflation, the credit is now up from $1,000 to $2,000. Additionally, $1,400 of that is refundable, whereas before it was just a deduction.

There is also a new $500 credit if you support a non-child dependent, such as an elderly parent or child over 17.

Funds from 529 accounts that could previously only be used for college tuition can now be used (up to $10,000) for enrollment in K-12 public, private or religious schools.

Wang notes that many of the tax law changes are set to expire in 2025, and are adjusted for inflation.

For example, the estate and gift tax has been doubled, so the basic exclusion amount has been extended from $5 million to $10 million for descendents dying or for gifts made after Dec. 31, 2017 and before Jan. 1, 2026.

Osiason warns that if you’re expecting a refund next year, don’t expect a quick one.

“The IRS will be behind schedule getting all the forms ready,” he said. “It’s such a massive change. The IRS has to write the regulations, figure out how to actually apply the rules and then redo so many forms.”

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Amazon Wants to Own Your Checking Account Now, Too

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Buying groceries, listening to your favorite audiobook, researching or watching TV … whatever activity you were engaged in today, there’s a good chance Amazon played a hand in some part of it. And now the online retail giant wants to be there for your banking needs, too.  

In a recent report by The Wall Street Journal, sources revealed Amazon is in talks with two of the country’s largest banking giants, JPMorgan Chase & Co. and Capital One Financial Corp., to develop a potential checking account product.  

The company’s idea, according to the anonymous sources, is to create a basic checking account as well as provide an option for individuals without traditional bank accounts. This could result in two offerings — a simple checking account and a prepaid debit card — but the company hasn’t officially announced anything yet, so we won’t know for sure until then.  

It’s unknown whether the bank-like service would offer paper checks, direct bill paying or access to a nationwide ATM network.  

Amazon isn’t the only major retailer looking to get into the finance game. Walmart announced in 2014 its low-cost checking account service GoBank, a brand of Green Dot Bank. 

The FDIC-insured banking option through Walmart boasts no overdraft fees, no bounced check fees and no continuing minimum balance requirements. Additionally, there’s an $8.95 monthly fee that is waived altogether if you have a payroll or government direct deposit each month of at least $500.  

 More Amazon moves

It’s hard to imagine a time when Amazon was just a bookseller. Since it first went public in 1997, the company is now ranked the no. 1 online store in the nation, a constant source of innovative new technology with sales of $178 billion in 2017 alone.  

In August 2017, Amazon finalized its acquisition of Whole Foods, solidifying itself in its customers’ lives as a brick-and-mortar store. The company also began offering 5% cash back to Whole Foods shoppers who use the Amazon Prime Rewards Visa® Signature Card.

In January 2018, the company took a step further with the release of its first cashless grocery store in Seattle. Artificial Intelligence and cameras throughout the store track customers and what they pick out, allowing for a seamless “just walk out” approach to grocery shopping.  

Amazon has surpassed Microsoft in market capitalization, with its value currently standing at over $747 billion vs Microsoft’s $722 billion, and with the support of its customers, doesn’t look like it’s slowing down anytime soon.

The retail (and now services) giant, could venture into several industries with as much enthusiasm from customers as there is for the possible new checking-account option.  

If Amazon were to expand into other services like health care, insurance, lending, investing and even its own form of cryptocurrency, there are plenty of people who are already on board.  

In a recent survey by LendEDU, 44.5% of respondents said they would trust Amazon as their checking account provider; 52% are open to an Amazon-based virtual currency; 38% trust the company as much as a traditional bank; 30.5% would utilize an Amazon investment service; and 36% would trust them with their retirement account. The trend is similar for lending services like mortgage, auto and personal as well as insurance options for health, auto and life.