One of the few certainties in life is Tax Refunds and the previous season often serves as a template for families in predicting their likely payments and tax refunds every year. Families learn to spend and adjust their savings accordingly. But the pandemic has created uncertainty due to the effect wrought by COVID-19.
Tax refunds have been generous for the past two years as successive federal stimulus checks have ensured that households and individuals continued to receive generous tax refund checks. For some low- and moderate-income families, that meant the largest single check that they received in the whole year.
The receipt of the tax refund during or immediately after the tax season has meant a major spurt in spending for many families. Tax time, or more specifically tax refunds, constitutes a major annual financial event for such families. It shapes the family’s pattern of spending and saving across the year.
The tax refund period constitutes major changes in families’ finances and the tax refunds have a direct connection with extra spending. Families experience a large swing in income in close to five months out of a year, especially in the first quarter and in December. And the spikes during this period have been attributed to tax refund payments.
The vast majority of families in the US receive tax refund checks; around 78% going by last estimates. For 29% of such families, the day the tax refunds arrive is the day with the highest positive cash flow. The average refunds come to over $3,000, which is roughly equivalent to 6 weeks of take-home pay.
The day the tax refund comes in for such families, they spend around $180 more than their normal spending. It comes to a 119% spurt in spending. The tax refund is also a period that sees a significant amount set aside as savings.
6 months after receiving a refund, the spending levels of an average family settle down to a steady income and expenditure. And the post refund state is also 7% higher than the pre-refund steady state. The checking account balances of families were also 11% higher than the baseline 6 months after the tax refunds.
Claiming A Tax Refund For Dependents
Claiming dependents correctly could help you save thousands of dollars on your taxes and also lead to a significant rise in your tax refund payments each year. Yet many of up remain ignorant of who exactly in our family qualifies as our dependent.
For income tax purposes, a dependent is defined as someone other than the taxpayer or spouse who qualifies to be claimed by the tax filer in the family on their tax return. Defined differently, a dependent is someone dependent on the tax filer for financial support that includes housing, clothing, food, necessities, and much more.
Normally, this individual or group comprises children and parents of the taxpayer, and may also include other relatives. It can also include persons not directly related to you, such as a dependent domestic partner.
Once you as a taxpayer identifies someone as your dependent in your income tax return, you are essentially informing the tax authorities that you are qualified to claim such person or persons as a dependent.
This essentially qualifies them for tax waivers and tax refund payments. For income tax years before 2018, filers were allowed to reduce their taxable income by a certain amount for every dependent that they declared on an income tax return. This was known earlier as an exemption deduction.
Till the tax year 2017, it was $4,050 for each qualifying dependent. Starting in 2018, the exemption deduction was done away with and was replaced by the way more generous Child Tax Credit, or the Other Dependent Credit, depending mainly on the age of the dependent and the relationship to the person against whom the tax refund is claimed. A tax credit is different from a tax deduction as the credit can directly lead to a reduction in taxes while the deduction can reduce the amount of income that is subject to income tax.
Claiming Someone As A Dependent
For those having a family, it is important to be clear about how the IRS defines dependents for income tax. It could mean savings that could run into thousands of dollars for a taxpayer.
Before the 2018 tax year, each of the qualified dependents meant a substantial reduction in taxes. It was $4,050 in 2017, which could mean a substantial saving for a large family.
Since 2018, exemption deductions were replaced with an increase in the standard deduction and a bigger Child Tax Credit stimulus check worth $2,000. For tax year 2021, it was increased to a maximum of $3,600.
The Additional Child Tax Credit was also increased to $1,500 for each qualifying child in 2022. There is also new Credit for Other dependents. It is worth $500 maximum for each qualifying dependent and is not to be confused with the Child and Dependent Care Credit.
The Other Dependent Credit in 2022 for qualifying relatives has been set at $500. There are other rules for dependents that include the Earned Income Tax Credit (EITC), and daycare expense reimbursement in the form of Child and Dependent Care. Some benefits cover medical expenses and many other itemized deductions. Other tax credits include family and children issues.
Qualifying for these deductions and tax refunds can mean either the difference between getting a substantial stimulus check, or owing money at the end of the tax year while filing income tax returns.
Qualifying For A Tax Refund Or Deduction As A Dependent
The IRS has an elaborate definition of what constitutes a dependent. The agency rules cover many situations, from emancipated offspring to housekeepers. To put it simply, a dependent can be either a dependent child or a qualifying relative. For both categories of dependents, there are several well-defined rules for qualification.
The person must be a US citizen, national, resident, or resident of Mexico or Canada. A person can only be claimed by one filer. Some rules establish parentage, residency, and income requirements for claiming a child as a dependent.
A person can not be claimed as a dependent if they are married and file a joint income tax return. This rule applies even to married children. But this rule is not applicable if the dependent files a joint return but then claims a tax refund of estimated tax paid or income tax withheld.