Just when America needs a financial boost, income tax refunds are up an average of nearly 10 percent, according to the Internal Revenue Service.
As of March 13, approximately 69 million individual returns had been filed, with an average refund of $3,036. That's up $266 from a year ago. The reasons for the bigger refunds vary somewhat depending on who you ask. Those in government, however, are sticking together.
IRS Commissioner Doug Shulman attributed most of the increase to last year's American Recovery and Reinvestment Act (ARRA), in a statement in early March. "The recovery act is a major factor behind these larger, record refunds. About half of all Americans haven't filed their taxes yet, so we urge them to look carefully at these recovery provisions."
Vice President Joe Biden also points to ARRA to explain the larger refunds, and urges taxpayers to be diligent in getting every refund dollar they have coming.
"The big guys know all the credits and deductions to claim during tax season, but we want middle class families to know just how much is out there for them this year thanks to the recovery act - and how to take advantage of it," he said in a prepared statement. "From help with college expenses to credits for cost-saving, energy-efficiency home improvements, these recovery act tax credits not only provide some needed relief for working Americans, but also help them invest in their families' futures."
Tax professional John Hewitt, founder and CEO of Liberty Tax, takes a somewhat broader view. According to Hewitt, there are a few reasons why refunds are bigger this year: We're in a recession, so people are earning less money and, therefore, owe less. Smaller incomes qualify taxpayers for more in credits, such as the Earned Income Credit. Plus, the housing credit is getting more use.
"I'm not a big fan of the stimulus plan that passed last year," he told AccountingWEB. "The American Recovery and Reinvestment Act was one of the worst bills ever passed for this country. But it had more credits and deduction - seven new credits - than I've seen in my 41-year tax career. They make for a real nice increase in this year's refunds."
Even so, Hewitt added that the stimulus package has been a boon to businesses like his. The law has people flocking to tax preparers and accountants to ensure they get all the tax breaks possible.
Here's a summary of the many credit available that taxpayers who qualify can use to legitimately pad their refunds:
- ARRA provided a tax credit of $400 per taxpayer, or $800 for married couples.
- For those collecting unemployment benefits, the first $2,400 was tax-free for 2009.
- Credits are expanded for low- to middle-income families with children. The earned income credit now has a maximum of $5,657 for families with three or more children, and the additional child tax credit is now accessible by more families through a reduced minimum earned income. Previously taxpayers had to have earned income of at least $12,550 to qualify. For 2009, this limit dropped to $3,000.
- College expense credits can deliver up to $2,500 in tax savings (part of the American Opportunity Credit).
- Students with 529 plans now can use these plans to purchase computer technology.
- Up to $8,000 is available through the First Time Homebuyer Credit. Taxpayers have the option of claiming this credit by amending their 2008 returns, or waiting to include it with their 2009 returns.
- Taxpayers can get tax credits for up to $1,500 for making energy-efficient improvements to their homes. Examples include adding insulation and installing energy-efficient windows.
- Sales tax deductions are available for those who purchase new vehicles. This applies to purchases made from February 17, 2009 to December 31, 2009. For states that do not have sales taxes, other taxes or fees might be deductible.