In an era of record-high gas costs and sizzling inflation, it may be the taxman who provides households with a breath of fresh air.
According to Internal Revenue Service data, the average refund is substantially greater this year.
According to numbers released Friday, the IRS provided refunds for over 38 million of the 53 million individual tax returns it handled through March 5. When compared to the same point previous filing season, this is an increase of more than 5% in refunds given.
So far this year, the average size of the refund is $3,401. This represents a 13.7% increase over the average $2,990 refund received at the same time previous year.
Of course, early figures may not accurately forecast where refund monies will wind up. The average refund by early December 2021 was $2,815.
This year, the IRS anticipates receiving more than 160 million individual tax returns. That implies the IRS has processed around one-third of all returns expected for the 2022 filing season.
The question is whether this tendency will continue for the other two-thirds of the returns — the families who still have to file certainly hope so.
What explains the figures?
According to Elaine Maag, senior fellow at the Tax Policy Center, it’s difficult to attribute the outcomes to a single source. She cites programmes such as the Child and Dependent Care Credit, the Child Tax Credit, and the Earned Income Tax Credit, all of which have been increased in size for 2021.
These are “the main three,” according to Mark Steber, chief tax information officer at Jackson Hewitt, who predicts larger refunds this year. “I’ll be very surprised if refunds pull back much more than they already do,” he said.
There is still plenty of time left in the tax season, so the upward tendency may fade, according to Maag. In most places, tax season concludes on April 18. (and April 19 for Maine and Massachusetts residents.) For the time being, here’s a rundown of what’s going on:
In 2021, the Child and Dependent Care Credit, Child Tax Credit, and Earned Income Tax Credit all become more generous.
For 2021, the Child and Dependent Care Credit was significantly increased. This is the on-the-books tax credit designed to assist families in defraying childcare expenditures while they work or go to work.
As part of the March 2021 American Rescue Plan, federal lawmakers increased the credit. The maximum payout for a household with a single kid or qualified dependant raised to $4,000 from $1,050 for one year only. The payout increased from $2,100 to $8,000 for households with two or more qualified children/adult dependents.
The income thresholds and percentages of care costs that are eligible for the credit payout were raised by lawmakers.
The credit also became completely refundable for the first time, opening it out to lower-income families, according to Maag. “However, the CDCTC benefits a relatively small set of people (approximately 14 percent of all families with children), so it’s not a significant effect.” This could benefit people of all income levels.”
In terms of children, the Child Tax Credit is another potential influence.
During the American Rescue Plan, Congress boosted the credit for children under the age of six from $2,000 to $3,600. It cost $3,000 for children aged 6 to 17. Families who did not opt out of the advance payments received half of the total.
Many families who received advance payments of the increased credit from July to December may now receive lower lump sums from the credit — and probably fewer refunds overall, practitioners observed.
Families with infants, on the other hand, are reaping the benefits of the credit, according to Steber. They will receive the increased payment in a lump sum, as well as a $1,400 recovery rebate credit for their infant’s stimulus check that they did not receive in 2021.
That’s $5,000 right there, he added, which can quickly bring up averages.
For 2021, the Child Tax Credit, like the Child and Dependent Care Credit, will be completely refundable.
When deciding Child Tax Credit payout levels, the IRS looked to 2020 tax returns or, if they weren’t available, to 2019 tax returns. If the child had not yet been born, the 2021 return was the first time the IRS learned about the infant and turned on the tax money to which their household was entitled.
Though the IRS’s improved facilities for Child Tax Credit payments permitted people to change information such as their bank account and mailing address, they did not allow parents to declare a new child in the family, according to Maag and Steber.
For 2021, the Child Tax Credit, like the Child and Dependent Care Credit, will be completely refundable. Previously, the credit was partially refundable and paid $1,400 before income tax liabilities released the remaining $600.
That’s a different explanation. Full refundability implies that families who could previously get $1,400 can now get advance payments of $1,500 or $1,800 and still earn a greater refund lump sum than in prior years, according to Maag. “There were around 27 million children who did not receive the full value of the CTC because their parents did not earn enough.”
For one subset of claimants, the Earned Income Tax Credit will also be significantly boosted in 2021.
For one subset of claimants, the Earned Income Tax Credit will also be significantly boosted in 2021. Prior to the American Rescue Plan, low- and moderate-income workers without children may earn just over $500 after a 7.65% tax on the first $7,030 of earned income.
Legislators increased the maximum compensation to slightly over $1,500 under the measure. For one year, the formula was made more liberal, with the credit percentage increasing to 15.3 percent and the age limitations being relaxed. Prior to the legislation’s passage, workers without children had to be at least 25 and under the age of 64. Legislators lowered the age to 19 for 2021, and the age maximum was removed.
Although the income range is rather limited, these folks would have gotten “significantly bigger” payouts under the credit, according to Maag.
Arlenys Nunez, office manager at her midtown Manhattan ATAX tax preparation office, claimed that more of her clients without children are receiving greater returns as a result of the Earned Income Tax Credit.
Although some people are experiencing lesser or equal-sized refunds due to smaller Child Tax Credit lump sums, Nunez stated, “We know that the rise in the [Earned Income Tax Credit], the Child Tax Credit, and the Child Care Credit is assisting our clients in getting a greater refund.”
According to IRS data, over 25 million workers claimed the credit last year. To be fair, there’s a significant number, but even before the pandemic, there was concern that taxpayers were still ignoring the credit. According to IRS data from 2011 to 2018, around two out of every ten eligible households did not take advantage of the benefit.