Americans continue to benefit from a slew of epidemic relief measures, which have resulted in the largest tax refunds in more than a decade at this stage in the filing season.
For those who have already submitted their tax returns to the IRS, the average refund was $3,352, up 13% from a year ago and the highest average refund since at least 2010. That is a significant increase, given that the year-over-year difference has historically been less than 1% as of mid-March.
One significant reason is that one of the pandemic relief measures, the American Rescue Plan Act, increased the child tax credit from $2,000 to up to $3,600 per kid in 2021 for over 39 million eligible households. Additionally, the credit was made entirely refundable, meaning that even if you did not owe enough taxes to qualify for the full credit, you will still receive the full amount. Previously, the credit could only be refunded in cash up to $1,400 per child.
Many families receive the child tax credit as part of their tax refund. Last year, half of new credit was paid in advance, beginning in July, via monthly instalments. Thus, one may assume that the $1,800 per child already paid out would have reduced or maintained the average refund.
However, a variety of other factors influenced this year’s tax refund season.
To begin, keep in mind that we’re discussing averages here. Individual situations vary, and anyone may receive a lower return or owe more money to the government as a result of less deductions — such as for student loan interest following the suspension on federal loan payments — or they may have failed to withhold enough after changing jobs.
Refunds are typically larger earlier in the tax filing season, since people anticipating a large refund are more likely to file first. Nonetheless, the average tax refund this year is expected to be greater than in previous years.
When it comes to the child tax credit, many families simply received far larger credits (even 17-year-olds were eligible), which bloated returns even after receiving half the money earlier in the year. Additionally, some families elected not to receive the child tax credit in advance, preferring to wait until they received their entire return. Others who had a child in 2021 but did not notify the IRS until they filed their returns this year will receive the entire refund.
Additionally, there were additional substantial tax credits that were not paid in advance that may have helped boost refunds. Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, notes that the American Rescue Plan significantly expanded the child and dependent care credit, making it fully refundable after previously being non-refundable. Additionally, there is a refund credit for people who did not receive the full amount of stimulus checks available to them in the third round, as well as a larger earned-income tax credit for younger employees without children.
Additionally, the hot labour market played an impact. In 2021, more people were employed than in 2020, during the pandemic’s peak. And earnings and benefits increased by around 4%, the greatest in two decades. Increased employment and greater salaries often result in increased withholding from paychecks, which is then distributed as a larger tax refund after returns are submitted.
Now, I feel compelled to remind out that large refunds are not always beneficial to your own finances. Economists and financial gurus caution against providing the US government with an interest-free loan, which is exactly what happens when you withhold too much and receive a large return in April. As accurate as it is, the majority of individuals still prefer a lump amount. According to a recent Bloomberg News report, only 7.4 percent of respondents agreed with the statement “I dislike receiving tax returns because it means I overpaid over the year.” As a result, taxpayers should be pleased this year.