Why tax refunds may be bigger this year

Americans are still benefiting from a raft of pandemic relief measures that are contributing to the biggest tax refunds seen at this point in the filing season in more than a decade.

For those who have already sent their tax returns to the IRS, payouts averaged $3,352 for the week ended March 11, a 13% increase from a year ago and the largest average refunds since at least 2010. That’s a big jump considering the year-to-year difference has typically been less than 1% as of mid-March.

One big reason is a provision in one of the pandemic relief measures, the American Rescue Plan Act, that expanded the child tax credit to as much as $3,600 a child in 2021 from $2,000 for some 39 million eligible families. The credit was also made fully refundable, which means that even if you didn’t owe enough in taxes to get the total credit, you still get paid the full amount. Previously, cash refunds for the credit were limited to $1,400 a child.

Michael Nagle/Bloomberg

For many families, the child tax credit is distributed as part of their tax refund. Last year, half of the new credit was paid in advance via monthly installments starting in July. So one might have thought that the $1,800 a child that was already paid out would have reduced the average refund, or kept it pretty flat.

But a lot of other things played into this tax refund season.

First, keep in mind that we’re talking about averages here. Individual circumstances are different, and any person may have a smaller refund or owe the government more money because of fewer deductions — such as for student-loan interest following the moratorium on federal loan payments — or maybe they didn’t withhold enough after changing jobs.

Refunds tend to be bigger earlier in the tax filing season because those expecting big money back are most likely to file first. But even so, the average tax refund this year is poised to close out the season higher compared with past years’ filing season statistics.

When it comes to the child tax credit, many families simply got much bigger credits (even 17-year-olds could be claimed), which fattened refunds even after receiving half the money earlier in the year. There were also some families that opted not to receive the child tax credit in advance, waiting until their refund for the full amount. Others that had a baby in 2021 and didn't let the IRS know until filing their returns this year will get the full amount in their refund.

And there were yet more generous tax credits that weren’t paid in advance that could be helping to juice up refunds. Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, points out that a separate credit for child and dependent care was enhanced dramatically as part of the American Rescue Plan, and made fully refundable after not being so at all. There’s also a rebate credit for those who didn’t receive the full amount they were eligible for in the third round of stimulus checks, and a bigger earned-income tax credit for younger workers without children.

The hot labor market played a role, too. More people were employed in 2021 than in 2020 during the height of the pandemic. And wages and benefits went up by about 4%, the most in 20 years. More workers and higher wages generally means more money withheld from paychecks that then gets distributed as a bigger tax refund after returns are filed.

Now, I’m obliged to point out that big refunds aren’t really a positive for your personal finances. Economists and financial advisers warn that it’s silly to give the U.S. government an interest-free loan, which is effectively what you’re doing when you withhold too much and get a big refund in April. As true as that is, most people still prefer getting the lump sum. A recent Bloomberg News article quoted a LendingTree survey that found just 7.4% of respondents agreed with the statement “I don’t like getting tax refunds because it means I overpaid throughout the year.’’ So that should make for some happier taxpayers this year.