In a time of record-breaking gas prices and hot inflation, it’s actually the taxman who might be giving families a cool breath of fresh air.
The average tax refund is noticeably higher this year, according to data from the Internal Revenue Service.
Of the 53 million individuals tax returns the IRS processed through March 5, it issued refunds for almost 38 million, according to statistics released Friday. That’s over 5% more refunds issued, compared to the same point last filing season.
The average size of the refund this year — so far, at least — is $3,401. That’s a 13.7% increase from the average $2,990 refund issued at the same point last year.
Of course, early numbers may not predict where refund amounts end up. By early December 2021, the average refund was $2,815.
The IRS is expecting more than 160 million individual tax returns this year. That means the tax agency has processed around one-third of all the returns it’s expecting for the 2022 filing season.
The question is whether this trend can hold for the next two-thirds of the returns — the families still to file sure hope so.
What explains the increase in average tax refunds?
It’s tricky to pin the results so far to one factor, according to Elaine Maag, senior fellow at the Tax Policy Center. She points to provisions like the Child and Dependent Care Credit, the Child Tax Credit and the Earned Income Tax Credit, all of which were more generous for 2021.
Those are “the big three,” said Mark Steber, chief tax information officer at Jackson Hewitt, who’s been anticipating higher refunds this year. “I will be highly surprised if refunds pull back much more than they are,” he said.
There’s still plenty of tax season left to go, meaning the elevated refund trend might fade, Maag cautioned. Tax season ends in most places on April 18 (and April 19 for Maine and Massachusetts residents.) For now, here’s a look at what’s going on:
“The Child and Dependent Care Credit, the Child Tax Credit and the Earned Income Tax Credit were all more generous in 2021.”
The Child and Dependent Care Credit was much more generous for 2021. This is the tax credit on the books to help families defray their childcare costs while they work or go to work.
Federal lawmakers enhanced the credit as one part of the March 2021 American Rescue Plan. For one year only, the maximum payout for a household with a single child or eligible dependent increased to $4,000 from $1,050. For families with two or more eligible children/adult dependents, the payout increased to $8,000 from $2,100.
Lawmakers increased the income thresholds and percentages of care costs that are eligible for the credit payout.
The credit also became fully refundable for the first time, opening up the credit to lower-income families, who will receive the money in their refund, Maag said. “It’s a relatively small group of people that benefit from the CDCTC though (about 14% of all families with children), so it’s not a huge factor. People across the income spectrum could benefit from this.”
Speaking of kids, another possible contributor is the child tax credit.
During the American Rescue Plan, lawmakers increased the credit from $2,000 to $3,600 for children under age 6. It was $3,000 for kids ages 6-17. Half the sum came to families that didn’t opt out of the enhanced credit. They received the first half in advance monthly payments from July to December.
Many families that received advance payments are going to receive smaller lump sums from the credit now in their refund, practitioners noted — and therefore potentially smaller refunds overall.
However, families with infants are really reaping the credit’s rewards, Steber noted. They are getting up the boosted payment in a lump sum, plus a $1,400 recovery rebate credit for their infant’s stimulus check they didn’t receive during 2021.
That’s $5,000 right there, which can quickly pull up averages, he said.
“The child tax credit, like the Child and Dependent Care Credit, became fully refundable for 2021. ”
When the IRS was determining Child Tax Credit payout amounts, it looked to 2020 tax returns, or 2019 tax returns, if those weren’t available. If the child wasn’t born yet, the 2021 return became the first time the IRS knew about the baby, and turned on the tax money their household was entitled to.
Though the IRS’s updated tools related to the Child Tax Credit payments allowed people to update information like their bank account and mailing address, it didn’t give people the capability to report a new child in the household, Maag and Steber said.
The child tax credit, like the Child and Dependent Care Credit, became fully refundable for 2021. Before then, the credit was partially refundable and paid $1,400 before income tax liabilities unlocked access to the rest of the $600.
That’s another possible explanation. Full refundability means families that were once able to get $1,400 could now get advance payments of $1,500 or $1,800, and still get a larger refund lump sum compared to previous years, Maag said. “There used to be about 27 million children who didn’t get the full value of the CTC because their parents didn’t earn enough.”
“The Earned Income Tax Credit also increased noticeably in 2021 for one subset of recipients.”
The Earned Income Tax Credit also increased noticeably in 2021 for one subset of recipients. Before the American Rescue Plan, low- and moderate-income workers without kids could get just above $500 in their refunds with a 7.65% cut on the first $7,030 of earned income.
In the legislation, lawmakers enabled the maximum payout to reach just over $1,500. For one year, the formula became more generous — with the credit percentage rising to 15.3% — and age requirements loosened too. Workers without kids previously had to be at least 25 and younger than 64 before the legislation was enacted. For 2021, lawmakers lowered the age to 19 and the age maximum went away.
It’s a relatively narrow income range, but these people would have received “substantially larger” payouts under the credit, said Maag.
At her midtown Manhattan ATAX tax preparation office, office manager Arlenys Nunez said more of her clients without children are seeing larger refunds due to the Earned income Tax Credit.
Although some people are seeing smaller or equal-sized refunds because of smaller child tax credit lump sums, Nunez said, “We know that the increase in the [Earned Income Tax Credit], the child tax credit, and the child care credit is helping our clients get a bigger refund.”
Approximately 25 million workers claimed the credit last year, according to IRS statistics. That’s a large number, to be sure, but even before the pandemic, there was concern that the credit was still being overlooked by taxpayers. From tax years 2011 to 2018, the IRS’ own data shows around two in ten eligible households are not participating in the credit.