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Money

Tax Refund on Prepaid Debit Card Could Carry Heavy Fees

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By Beverly Blair Harzog

It’s plastic, it’s got a magstrip, and a bank logo, but don’t treat that tax refund given in the form of a prepaid card like it’s just another debit card. For instance, if you use it more than once at a bank to make a withdrawal, it could cost you $10 every time. And that’s just the beginning of the fees that can be hiding in these state tax refund prepaid cards.

On the surface, I don’t have a problem with states giving tax refunds on prepaid cards. The practice could save states lots of money that can be used for more important things, such as for education and healthcare.

Here’s where I take issue with this: There are fees if you use the prepaid card in certain ways. For example, if you try to use the card at an out-of-network ATM to withdraw your cash, you’ll pay $2.50 each time.But I read a story in the Huffington Post last week that caught my eye. It seems that South Carolina is issuing state income tax refunds on prepaid cards unless you specifically request to receive your refund some other way. So the prepaid card, issued by Bank of America, is the default.

If you go to a bank multiple times to withdraw small amounts of cash, you’ll really get dinged. The first withdrawal is free, but after that, you’ll pay $10 for each withdrawal. The way to avoid this is to visit the teller and withdraw all your cash at one time. There’s no fee for doing it this way. If you have a savings or checking account, you can also transfer the funds to one of your accounts for free.

Many other states are offering refunds on prepaid cards so be aware of fee traps. Oklahoma, for instance, offers tax refunds on a prepaid card and charges a $1.50 inactivity fee if the card isn’t used for 60 days. New York is offering a prepaid card and notes that the first cash withdrawal at a bank is free, but additional withdrawals are $1 each.

You also need to be aware of expiration dates. The New York refund card, after its activated, expires in 18 months. It’s inconvenient, but there’s no charge to call customer service and have the card replaced. But in South Carolina, the card expires after only 12 months. You can call customer service to have the card replaced, but you’ll pay a $5 account closure fee to get a new card.

BOTTOM LINE: If you’re receiving your state tax refund on a prepaid card, read the fine print so you know how to use the card to avoid the fees. Consumers should not be expected to pay fees on money that’s owed to them. Both the bank issuing the prepaid card and the state government stand to benefit from the fees you pay. Don’t give either of them any more of your money than you absolutely have to.

[Related Article: Prepaid Cards: How to Become a Fine Print Warrior]
[Credit Cards: Research and compare prepaid credit cards at Credit.com]
[Free Resource: Check your credit for free before applying for a credit card]

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