IRS Refunds Could Increase by $1,000 Compared to Last Year

Several new financial studies predict that 2025 federal tax refunds could rise by an average of almost $1,000 when Americans file their 2025 taxes in 2026. This projected boost comes from updated tax data, expert evaluations, and major legislative changes introduced under a new federal reform.

To help taxpayers prepare, here is a clear breakdown of why refunds are increasing, who benefits the most, and what tax changes are driving the surge.

Why Your 2025 Tax Refund Could Increase by Nearly $1,000

Historic Jump Expected in 2026 Refunds

Financial analysts report that the average tax refund—which was about $3,151 last season—may rise to $4,151 in 2026, marking an increase of nearly 33%. This estimate comes from a detailed assessment by Piper Sandler, one of the nation’s leading financial firms.

How the OBBBA Act Is Boosting Your Refund

The 2025 Tax Reform Behind the Refund Increase

The key reason for this historic jump is the 2025 tax reform, officially named the One Big Beautiful Bill Act (OBBBA). Passed in July 2025, the act introduced sweeping tax adjustments applied retroactively, affecting income earned throughout the year.

Major Tax Changes Under OBBBA

The law includes several taxpayer-friendly updates, such as:

• Ending taxes on overtime income and tip income
  — a major benefit for workers in hospitality, retail, and service jobs.
• Temporarily expanding the SALT deduction limit
  — increasing it from $10,000 to $40,000, significantly helping taxpayers in high-tax states.
• Extending earlier tax cuts
  — including reduced marginal tax rates first introduced in the 2017 tax reform.

These measures collectively reduce tax obligations for millions of Americans.

Why Not Updating Your W-4 Could Lead to a Bigger Refund

Millions Overpaid Taxes Without Realizing It

Another major reason for the increase is that many taxpayers did not update their W-4 forms after the new rules took effect. Because the reform applied retroactively, old withholding tables continued to deduct more money than needed from paychecks in early 2025.

This means:

• Workers unknowingly overpaid taxes throughout the year
• The IRS will return the excess when they file
• Resulting in larger-than-normal refunds for millions

How Much Tax Relief Will Americans Receive?

Federal estimates show that the OBBBA is expected to deliver $191 billion in net tax relief by 2026.

Breakdown of the benefits:

• $91 billion — expected to be returned as higher tax refunds
• $30 billion — savings from lower paycheck withholdings throughout the year

Who Will Benefit the Most From the Refund Increase?

Middle- and Upper-Middle-Income Households Gain the Largest Boost

Analysts say the biggest winners will be households earning between:

• $60,000 and $400,000 per year

These taxpayers often:

• Use itemized deductions
• Live in high-tax states
• Are eligible for SALT expansion benefits
• Have higher overtime or tip-based income

Limited Benefits for Low-Income Taxpayers

Low-income filers may see little to no increase due to:

• Limited access to itemized deductions
• Simpler filing profiles
• Lower taxable income overall

What Tax Changes Are Responsible for the Higher Refunds?

1. Removal of Taxes on Overtime and Tip Income

This adjustment will especially help workers in:

• Hospitality
• Food service
• Transportation
• Retail

For many Americans, this change alone could significantly increase refund amounts.

2. Expansion of the SALT Deduction

The temporary jump in the SALT cap from $10,000 to $40,000 benefits:

• Residents of high-tax states
• Taxpayers who itemize deductions
• Upper-middle-income earners

3. Continuation of Lower Tax Rates

The retention of reduced marginal tax rates from past reforms keeps tax burdens lower for a wide range of income levels.

Prepare Now for the 2026 Tax Filing Season

Even though filing begins in early 2026, experts recommend:

• Reviewing and updating W-4 forms
• Tracking overtime and tip income
• Planning how the SALT deduction changes may affect your return
• Preparing for possible refund delays due to higher claim volumes

Understanding these adjustments now helps taxpayers avoid confusion and maximize their 2025 tax refund.

The IRS has officially announced financial support for eligible Americans through the IRS Confirms $1,390 Direct Deposit Relief Payment for December 2025 and How to Apply, aiming to help households manage rising living costs. This payment will be sent directly to bank accounts for qualified taxpayers, including low-income families, seniors, and individuals affected by economic challenges. The update also highlights simple application steps, ensuring people know how to verify eligibility and submit required documents to receive their relief on time.

Conclusion

The expected $1,000 increase in 2025 tax refunds is driven by the powerful combination of the OBBBA tax reform, expanded deductions like the SALT cap, the elimination of taxes on overtime and tips, and widespread over-withholding throughout the year. While middle-income and upper-middle-income households stand to gain the most, all taxpayers should prepare early for the 2026 filing season to ensure they receive the full benefits available to them.

FAQs

1. Why are tax refunds expected to rise in 2026?

Refunds are increasing due to the OBBBA tax reform, expanded deductions, and many workers overpaying taxes through outdated withholdings.

2. Which income groups benefit the most?

Households earning $60,000 to $400,000 will see the biggest gains because they qualify for multiple new deductions and incentives.

3. Will low-income taxpayers see a refund increase?

Not significantly. Low-income filers typically do not itemize deductions and may not qualify for the larger incentives.