Tax Refunds and the One Big Beautiful Bill Act

When taxpayers file their 2025 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. returns in 2026, many will see larger refunds than in recent years. That’s due to the One Big Beautiful Bill Act (OBBBA), which reduced individual income taxes for 2025 by an estimated $129 billion. But because the IRS did not adjust withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. tables after the law passed, workers generally continued to withhold more taxes from their paychecks than the new law required. As a result, instead of gradually receiving the benefit of the tax cuts through higher take-home pay during the year, most taxpayers will receive it all at once when they file their returns.

Seven major tax cuts took effect for 2025 under the OBBBA:

• Maximum child tax credit increase of $200
• Standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. increase of $750 for single filers and $1,500 for joint filers
• State and local tax (SALT) deductionThe state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both. cap increase to $40,000 for taxpayers earning under $500,000
• New $6,000 additional deduction for seniors that starts phasing out when taxpayers make more than $75,000 ($150,000 joint)
• New $10,000 auto loan interest deduction that starts phasing out when taxpayers make more than $100,000 ($200,000 joint)
• New deduction for up to $25,000 in tip income that starts phasing out when taxpayers earn more than $150,000 ($300,000 joint)
• New deduction for up to $12,500 in overtime income ($25,000 for joint filers) that starts phasing out when taxpayers earn more than $150,000 ($300,000 joint)

Tax Foundation estimates that, altogether, these seven provisions cut individual income taxes by $129 billion in 2025. Beyond the individual tax cuts, the OBBBA also changed several business-side provisions for 2025, including 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco, full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for research and development (R&D) costs, temporary expensing for manufacturing structures, and a more generous business interest deduction. The business tax cuts may affect individual tax returns of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. owners, such as LLCs, sole proprietorships, and partnerships.

Beginning in 2026, several additional tax changes will take effect, and withholding tables will adjust so that taxpayers receive the tax cuts through higher take-home pay going forward.

Table 1. OBBBA Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source Cuts for 2025 Total to $129 Billion

While we estimate that the OBBBA’s individual tax cuts will reduce revenue by $129 billion in 2025, we do not estimate how much of that amount will show up as refunds versus lower balances due at filing.

In each of the past two tax years, more than 100 million taxpayers have received refunds averaging around $3,000, totaling more than $300 billion in each tax year. Private-sector economic analysis suggests the OBBBA will result in up to $100 billion in higher refunds in 2026 overall, with average refunds up between $300 to $1,000 compared to a typical year.

Refund size will vary significantly depending on taxpayers’ circumstances. Tax Foundation’s tax calculator illustrates differences in tax liability (but not in refund size) for several sample taxpayers under the OBBBA for the 2026 tax year. Seniors will benefit from the new $6,000 deduction, and taxpayers with dependent children will benefit from the larger child tax credit. Workers who receive tips or overtime pay may see larger refunds because of the deductions for those types of income. Taxpayers who do not qualify for those specific provisions may still benefit from the increased standard deduction, or, for itemizers, from the expanded SALT cap. 

Overall, we estimate the major tax changes for 2025 will lead to an average tax cut of $611, or a 0.8 percent increase in after-tax income. Middle and upper-middle income groups will see the largest share of filers with a tax cut. Lower-income filers with little to no tax liability do not benefit, while the very highest-income taxpayers are ineligible to benefit from most of the new tax cuts due to income limits.

Table 2. Distributional Estimates of Certain Individual Tax Changes for 2025

While refund size will receive much attention throughout the filing season, this isn’t what determines the major economic impact of the OBBBA. The law’s changes to marginal incentives going forward are what grow the economy. For example, many of the tax cuts that are boosting refunds were made retroactively—and taxpayers cannot go back to 2025 to work or invest more. Instead, the law’s reduction in marginal tax rates moving forward will encourage more work and investment.

Refunds will undoubtedly rise for millions of taxpayers under the OBBBA, reflecting the law’s reduction in individual tax burdens, but simply putting more cash into people’s pockets is not why the tax law is expected to boost long-run economic growth.

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