Millions of Americans filing their taxes this season may be in for an unexpected boost. New federal tax changes signed into law last summer are now colliding with IRS withholding rules in a way that could significantly increase refunds for the 2025 tax year. For many middle-income households, the difference could be hundreds — or even thousands — of dollars.
President Donald Trump’s sweeping tax package, formally enacted in July 2025, extended key elements of the 2017 tax cuts while adding several new deductions and credits aimed at working families and retirees. The law expanded the child tax credit, introduced new deductions for overtime pay and tipped income, and created targeted relief for older Americans receiving Social Security benefits. It also raised the cap on how much taxpayers can deduct for state and local taxes, a move with major implications for residents of high-tax states.
Yet despite these changes, most paychecks in 2025 did not reflect the new tax rules. The IRS chose not to immediately adjust withholding tables while the law was phased in. As a result, many workers paid more in taxes throughout the year than they ultimately owed. That overpayment is now set to show up as a larger refund when tax returns are filed in early 2026.
According to estimates from the Tax Foundation, the average federal tax refund could rise sharply — from just over $3,050 last year to roughly $3,800 for the 2025 tax year. For some households, refunds could climb even higher depending on income, family size, and eligibility for new deductions.
One of the most impactful changes is the expansion of the child tax credit. Families with qualifying dependents now receive a higher credit per child, directly lowering their tax bill. Unlike deductions, tax credits reduce taxes dollar for dollar, making them especially valuable for middle-income earners.
The law also introduced new deductions for specific types of income. Workers who earn tips or regularly receive overtime pay can now deduct a portion of that income from their taxable earnings. For hourly workers in service, healthcare, manufacturing, and logistics roles, this change can meaningfully reduce total tax liability.
Older Americans are also affected. New deductions tied to Social Security benefits aim to reduce taxes for retirees who rely heavily on fixed incomes. Combined, these provisions explain why many filers owe less tax for 2025 than they paid throughout the year.
As a result, many employees had more money withheld from each paycheck than necessary. That excess now returns as a refund. Tax policy experts say this explains why refunds may feel unusually large compared with recent years.
The Tax Foundation estimates that average refunds will jump by nearly 25% year over year. While the “average” hides wide variation, analysts agree that middle- and upper-middle-income filers are the most likely to benefit. Lower-income households often already owe little or no federal income tax, while higher earners may not qualify for many of the new targeted deductions.
Refund amounts also depend on filing status, dependents, and location. Residents of states such as California, New York, and New Jersey could see additional relief due to changes in state and local tax deductions. Parents, older workers, and tipped employees may see the largest gains.
Workers with overtime or tip income may see refunds rise even if their wages did not change. Retirees with Social Security income could also benefit, depending on how much of their benefits were previously taxable.
Tax analysts caution that refunds reflect overpayment, not free money. A larger refund means less take-home pay during the year. That dynamic will shift soon. The IRS has already updated withholding tables for tax year 2026. Future paychecks are expected to be higher, while refunds next year may shrink.
Experts recommend reviewing W-4 forms to avoid excessive withholding going forward, especially after a larger-than-expected refund. Life changes such as marriage, children, or a new job can also affect accuracy.
A: Tax refunds are rising mainly because IRS withholding rules did not reflect new tax laws during 2025. Many workers paid more federal tax than required under updated credits and deductions. When returns are filed in 2026, that excess withholding is refunded. The Tax Foundation estimates the average refund could reach about $3,800.
Q: Who is most likely to benefit from the larger tax refunds this year?
A: Middle- and upper-middle-income filers are expected to see the biggest gains. Families claiming the higher child tax credit, workers earning overtime or tips, and residents of high-tax states benefit most. Lower-income filers often already owe little tax, while high earners qualify for fewer new deductions.
President Donald Trump’s sweeping tax package, formally enacted in July 2025, extended key elements of the 2017 tax cuts while adding several new deductions and credits aimed at working families and retirees. The law expanded the child tax credit, introduced new deductions for overtime pay and tipped income, and created targeted relief for older Americans receiving Social Security benefits. It also raised the cap on how much taxpayers can deduct for state and local taxes, a move with major implications for residents of high-tax states.
Yet despite these changes, most paychecks in 2025 did not reflect the new tax rules. The IRS chose not to immediately adjust withholding tables while the law was phased in. As a result, many workers paid more in taxes throughout the year than they ultimately owed. That overpayment is now set to show up as a larger refund when tax returns are filed in early 2026.
According to estimates from the Tax Foundation, the average federal tax refund could rise sharply — from just over $3,050 last year to roughly $3,800 for the 2025 tax year. For some households, refunds could climb even higher depending on income, family size, and eligibility for new deductions.
New tax law changes driving bigger refunds in 2026
At the center of this year’s larger refunds is the structure of the new tax law itself. The legislation extended lower marginal tax rates first introduced in 2017, preventing a scheduled tax increase for millions of households. It also increased the standard deduction, reducing taxable income for filers who do not itemize.One of the most impactful changes is the expansion of the child tax credit. Families with qualifying dependents now receive a higher credit per child, directly lowering their tax bill. Unlike deductions, tax credits reduce taxes dollar for dollar, making them especially valuable for middle-income earners.
The law also introduced new deductions for specific types of income. Workers who earn tips or regularly receive overtime pay can now deduct a portion of that income from their taxable earnings. For hourly workers in service, healthcare, manufacturing, and logistics roles, this change can meaningfully reduce total tax liability.
Older Americans are also affected. New deductions tied to Social Security benefits aim to reduce taxes for retirees who rely heavily on fixed incomes. Combined, these provisions explain why many filers owe less tax for 2025 than they paid throughout the year.
IRS withholding delay means many workers overpaid taxes
The size of this year’s refunds is not just about tax cuts. Timing matters. The IRS did not update federal withholding tables for 2025, meaning employers continued to deduct taxes based on old rules even after the new law took effect.As a result, many employees had more money withheld from each paycheck than necessary. That excess now returns as a refund. Tax policy experts say this explains why refunds may feel unusually large compared with recent years.
The Tax Foundation estimates that average refunds will jump by nearly 25% year over year. While the “average” hides wide variation, analysts agree that middle- and upper-middle-income filers are the most likely to benefit. Lower-income households often already owe little or no federal income tax, while higher earners may not qualify for many of the new targeted deductions.
Refund amounts also depend on filing status, dependents, and location. Residents of states such as California, New York, and New Jersey could see additional relief due to changes in state and local tax deductions. Parents, older workers, and tipped employees may see the largest gains.
Who benefits most from the 2025 tax changes
Not every filer will see a dramatic increase. The biggest gains are concentrated among households earning moderate incomes with children or qualifying deductions. Families claiming the child tax credit are positioned to see a noticeable boost, especially if they also benefited from the higher standard deduction.Workers with overtime or tip income may see refunds rise even if their wages did not change. Retirees with Social Security income could also benefit, depending on how much of their benefits were previously taxable.
Tax analysts caution that refunds reflect overpayment, not free money. A larger refund means less take-home pay during the year. That dynamic will shift soon. The IRS has already updated withholding tables for tax year 2026. Future paychecks are expected to be higher, while refunds next year may shrink.
Experts recommend reviewing W-4 forms to avoid excessive withholding going forward, especially after a larger-than-expected refund. Life changes such as marriage, children, or a new job can also affect accuracy.
FAQs:
Q: Why are tax refunds expected to be higher for many Americans in 2026?A: Tax refunds are rising mainly because IRS withholding rules did not reflect new tax laws during 2025. Many workers paid more federal tax than required under updated credits and deductions. When returns are filed in 2026, that excess withholding is refunded. The Tax Foundation estimates the average refund could reach about $3,800.
Q: Who is most likely to benefit from the larger tax refunds this year?
A: Middle- and upper-middle-income filers are expected to see the biggest gains. Families claiming the higher child tax credit, workers earning overtime or tips, and residents of high-tax states benefit most. Lower-income filers often already owe little tax, while high earners qualify for fewer new deductions.
