The expectation of IRS refunds for the 2025 tax year, which will be filed in 2026, points to a significant increase for many American taxpayers. This scenario is directly linked to the enactment of the One Big Beautiful Bill Act (OBBBA), signed in July 2025.
The law establishes retroactive tax deductions and exemptions for 2025 income. This legislation, sometimes referred to as the “Working Families Tax Cuts,” is part of a package of reforms championed by Republicans.
Projections indicate that average refunds could increase by approximately $1,000 per taxpayer. This adjustment would raise the typical amount to approximately $4,151.
Why Your 2026 Tax Refund Will Be Larger: The Retroactivity Factor
In aggregate terms, estimates indicate that taxpayers will receive a total of $91 billion in additional refunds. However, the distribution of these benefits is not uniform. A closer examination reveals that upper-middle and high-income households will be the most favored group.
In contrast, low-income taxpayers could experience marginal or no benefits. The design of the legislation and its enforcement mechanism explain these disparities. The retroactive application of deductions is a key factor, as taxpayers paid taxes in 2025 under the previous regulatory framework.
By filing their returns in 2026 and applying the new rules, they overpaid, and the IRS refunded them. Furthermore, the lack of timely adjustments to the withholding tables prevented employers from withholding accurate amounts.
The OBBBA Act That Changed It All
The One Big Beautiful Bill Act (OBBBA) is a budget reconciliation law that combines tax cuts with spending adjustments. Its retroactive nature is a defining aspect: the changes apply to income earned in 2025, but taxpayers can only claim them when filing their 2026 tax returns.
The tax system operates on an estimated tax basis. Because the IRS did not update the withholding tables in time, employers withheld higher amounts based on the old rules.
This administrative lag resulted in widespread tax overpayments throughout 2025, which will materialize as an expanded refund in 2026. The Penn Wharton Budget Model has estimated the budgetary impact. According to its projections, the tax cuts will reduce federal revenue by between $4.3 and $4.6 trillion over the next decade.
This reduction would contribute to an increase in the federal primary deficit of approximately $2.8 trillion.
Specific Tax Changes and Their Impact
The OBBBA introduces a variety of new and expanded deductions and credits. Among the most significant changes is the elimination of taxes on tips and overtime pay. This provision allows for a deduction of up to $25,000 in tips and up to $12,500 for individuals on overtime pay.
Another substantial change is the increase in the State and Local Taxes (SALT) deduction. The limit is raised to $40,000. This adjustment primarily benefits residents of high-tax states.
Additionally, a deduction for seniors of up to $6,000 per person aged 65 and over is established, subject to modified adjusted gross income (MAGI) limits. The child tax credit is expanded to $2,200 per eligible child. Another new feature is the auto loan interest deduction, which allows for up to $10,000 in interest expenses.
The adoption tax credit is modified to be partially refundable, with a maximum amount of $17,280. According to official projections, the total of these changes represents $191 billion in net tax relief.
Uneven Benefit Distribution Highlighted by Tax Policy Center
Analysis of the distribution of tax benefits indicates that the group that will gain the most is comprised of middle- and upper-income taxpayers. The main reason lies in the nature of the deductions. Their economic value is greater for those in higher tax brackets.
Changes such as the increase in the SALT threshold disproportionately benefit those who pay high taxes and can itemize deductions.
The Tax Policy Center has quantified this imbalance, noting that households with incomes above $217,000 will receive approximately $6 out of every $10 allocated to the new cuts.
The Penn Wharton Budget Model confirms that around 60% of the cuts will go to the top 20% of the income distribution. At the opposite end of the spectrum, analyses suggest that low-income households could experience an average net loss, stemming from indirect impacts.
Final estimates place the average refund in the range of $3,743 to $4,151 per taxpayer. Total tax relief is estimated at $191 billion net. In terms of economic impact, it is argued that the injection of an additional $91 billion in refunds could boost household spending.
Critics argue that its design disproportionately favors the wealthy and that the increased federal deficit could have long-term consequences. The debate over the effects of the One Big Beautiful Bill Act continues.
