Wednesday June 29, 2022
Record 2021 Income Tax Refunds Over $3,400
With record levels of inflation and gas prices, there is welcome news for families. The Internal Revenue Service (IRS) indicated on March 5 that it has processed substantial tax refunds for 38 million families. This is 5% more refunds than at this time last year. Tax refunds this year average $3,400, up significantly from amounts a year earlier. The average refund for the prior year was $2,815.
There are three primary reasons for this increase in the size of tax refunds. These are the Child and Dependent Care Credit (CDCC), the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). All of these credits were enhanced for 2021 in the American Rescue Plan (ARP).
1. Child and Dependent Care Credit — The benefit for families who expend funds to care for minor children increased substantially. The American Rescue Plan increased the amount for one child from $1,050 to $4,000. If a family has two or more eligible children, the amount increased from $2,100 to $8,000. The ARP also raised both income thresholds and the percentage of childcare costs that qualify. About 14% of families with children receive benefits from the CDCC. Taxpayers should know that the 2021 credit is refundable.
2. Child Tax Credit — Another increase that benefits many families is the Child Tax Credit. The ARP increased the credit from $2,000 to $3,600 for children under age 6 and $3,000 for children from ages 6 to 17. In addition, up to one half of the credit was distributed through advance monthly payments during the second half of 2021. Families that receive advance payments are able to benefit from the balance of the credit when they file their 2021 tax returns. If a family has a new infant and other children, it could receive a $1,400 Recovery Rebate for the infant and the balance of the Child Tax Credits. Some families may receive an additional $4,000 or more in their tax refund. The CTC is also refundable.
3. Earned Income Tax Credit — The third increased credit under the ARP is the EITC. In previous years, the EITC was available for moderate-income workers and was 7.65% of $7,030 of income, or about $500. The ARP increased the percentage to 15.3% and changed a number of the age requirements. The maximum 2021 EITC payout is approximately $1,500.
Editor's Note: With the increases in the CDCC, the CTC and the EITC, it is reasonable to expect larger refunds this year. About two thirds of tax returns remain to be filed, but it is probable that the refund amounts will remain close to the current $3,400 number.
Published March 18, 2022