Why are US tax refunds running late this year?

It's nearing the end of August and if you still haven't received your tax refund, you're probably concerned -- but you're not alone. The IRS is still working through its backlog of unprocessed returns that have piled up due to the pandemic...a reported 35 million of them. The tax agency has also been tasked with sending stimulus payments, adjustments for refunds (including unemployment) and child tax credit payments. According to one report, it is faced with staffing issues on top of these new tax laws, child tax credit and stimulus checks. Equally, though, you may have made a mistake such as inputting the wrong number for the amount of stimulus money you received.

So where's your overdue cheque? We've done the legwork below so you don't have to. You can track your money using the online Where's My Refund tool.

Because of the pandemic, the IRS ran at restricted capacity in 2020, which put a strain on its ability to process tax returns and created a backlog. The combination of the shutdown, three rounds of stimulus payments, challenges with paper-filed returns and the tasks related to implementing new tax laws and credits created a "perfect storm," according to a National Taxpayer Advocate review of the 2021 filing season to Congress.

The IRS is open again and currently processing mail, tax returns, payments, refunds and correspondence, but limited resources continue to cause delays. The IRS said it's also taking more time for 2020 tax returns that need review, such as determining recovery rebate credit amounts for the first and second stimulus -- or figuring out earned income tax credit and additional child tax credit amounts.

Here's a list of reasons your income tax refund might be delayed:

  • Return has a 2020 EIP (economic impact payment) refund.
  • Your refund is suspected of identity theft or fraud.
  • You filed for the earned income tax credit or additional child tax credit.
  • Your return needs further review.
  • Your tax return has errors.
  • It is incomplete.
  • Your return includes Form 8379 (PDF), injured spouse allocation -- this could take up to 14 weeks to process.
If the delay is due to a necessary tax correction made to a recovery rebate credit, earned income tax or additional child tax credit claimed on your return, the IRS will send you an explanation. If there's a problem that needs to be fixed, the IRS will first try to proceed without contacting you. However, if it needs any more information, it will write you a letter.

Tax regulations changes proposed by the Biden administration

The Biden administration has released a Green Book, which details how it wants to change the way income, and specifically capital gains are taxed. Here is a quick summary of the proposed changes:

  • The top marginal individual income tax rate rises from 37% to 39.6%.
  • The top individual income tax bracket begins at $452,700, down from $523,601.
  • Capital Gains are taxed as ordinary income for taxpayers with incomes over $1 million.
  • Carried Interest is taxed as ordinary income for taxpayers with incomes over $400,000.
  • Any transfer of property (including gifts and at death) will be treated as a sale of the property and the capital gains will be taxed, with gains over $1 million being taxed at the new 39.6% rate (plus the 3.8% net investment income tax).
There is an exclusion for transfers to a spouse or to charity.

Tax on illiquid assets can be paid over 15 years.

President Biden has made it abundantly clear that he intends to raise taxes on the wealthiest Americans, in order to pay for a trillion-dollar infrastructure plan. The Biden administration has announced a number of tax proposals to fund new government investments such as infrastructure, education and family programs.

The American Jobs Plan would include the following major tax changes:
  • Raise the federal statutory corporate tax rate from 21 percent to 28 percent.
  • Raise the tax on Global Intangible Low Tax Income (GILTI) from 10.5 percent to 21 percent, calculate GILTI on a per-country basis, and eliminate the exemption of the first 10 percent return on foreign qualified business asset investment (QBAI).
  • Repeal the foreign derived intangible income (FDII) deduction.
  • Impose a 15 percent minimum tax on corporate book income for firms with over $2 billion in net income.
The proposed American Families Plan would include the following major tax changes:
  • Raise the top marginal income tax rate from 37 percent to 39.6 percent, which would apply to income over $452,700 for single and head of household filers and $509,300 for joint filers.
  • Tax long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income above $1 million, resulting in a top marginal rate of 43.4 percent when including the new top marginal rate of 39.6 percent and the 3.8 percent Net Investment Income Tax (NIIT).
  • Tax unrealised gains at death for unrealised gains above $1 million ($2 million for joint filers, plus current law capital gains exclusion of $250,000/$500,000 for primary residences).
  • Apply the 3.8 percent NIIT to active pass-through business income above $400,000. Limit 1031 Like-Kind Exchanges above $500,000 in deferred capital gains, end the preferred treatment of carried interest, and make permanent the 2017 tax law’s limitation on excess losses that applies to non-corporate income.
  • Extend the enhanced Child Tax Credit (CTC) in the American Rescue Plan Act (ARPA) through 2025, which provides $3,600 for children under age 6 and $3,000 for children ages 6 to 17 and phases out at a 5 percent rate beginning at $112,500 for head of household filers and $150,000 for joint filers. The credit amounts would not fall below what would be allowed in each year under current law.
  • Make permanent the American Rescue Plan Act changes that made the CTC fully refundable and expanded the Earned Income Tax Credit (EITC) and Child and Dependent Care Tax Credit (CDCTC).
  • Make permanent the expanded health insurance Premium Tax Credits provided in American Rescue Plan Act.
  • The American Families Plan would also increase Internal Revenue Service (IRS) funding by $80 billion over a decade to increase tax collections.