Millions of Americans could see larger tax refunds when they file their 2025 returns next year, as IRS withholding tables for 2025 were not adjusted to reflect new tax provisions signed into law last July. The average refund is projected to reach $3,800 for tax year 2025, up from $3,052 in 2024, according to estimates from the Tax Foundation.
The increase stems from President Trump’s One Big Beautiful Bill, which passed in July 2025 and extended 2017 tax cuts while adding new deductions for tips, overtime pay, auto loan interest, and Social Security benefits. The IRS did not adjust paycheck withholding tables for 2025, which can affect the amount withheld during the year compared with final tax liability.
Why Paychecks Haven’t Changed Yet
“Instead of your employer adjusting how much tax they withhold from your paycheck to reflect this new tax law for 2025, you’ll have to get the benefit of those tax changes when you file your tax return in 2026,” said Erica York, vice president of federal tax policy at the Tax Foundation. “Most people have overwithheld their taxes to some extent.”
Without changes to 2025 withholding tables, some workers may have more tax withheld during the year than their final tax liability requires. For taxpayers who overwithheld during 2025, the difference may be reflected in the refund amount when filing in 2026.
For 2026 paychecks, the IRS has updated its withholding tables to reflect the new law. The IRS updated withholding tables for 2026, which may change take-home pay as employers apply the updated tables.
Who Benefits Most From the Changes
Tax policy analysts said the size of changes may vary by income level and by eligibility for specific provisions. Analysts said eligibility for targeted deductions and the effect on liability can differ across income levels.
The law increased the child tax credit; the article notes that some details were not specified in available documentation. The state and local tax deduction cap increased from $10,000 to $40,000 for tax years 2025 through 2029 for taxpayers with modified adjusted gross income under $500,000. The higher cap phases out for individuals earning above $500,000 in modified adjusted gross income and reverts to $10,000 in 2030.
Workers who earn tips can now exclude up to $25,000 from their taxable income through 2028, provided the tips are reported on W-2 or 1099 forms and they work in qualifying jobs. The deduction phases out for individuals earning above $150,000 or married couples filing jointly above $300,000.
Similarly, overtime pay gets preferential treatment under the new law. Workers can deduct the premium portion of overtime—typically the time-and-a-half component—up to $12,500 for individuals or $25,000 for joint filers through 2028. The same income phaseouts apply.
“The average might conceal a lot of variation,” said Garrett Watson, director of policy analysis at the Tax Foundation. “An average taxpayer might see some benefit from that standard increase, maybe the child tax credit increase if they have a qualifying dependent, but otherwise they’re not in those other qualifying categories and they only see a slight bump in their refund.”
New Deductions and Permanent Changes
The legislation makes several 2017 Tax Cuts and Jobs Act provisions permanent, including individual tax rates and brackets that were set to expire at the end of 2025. Standard deductions are now locked in at $31,500 for married couples filing jointly, $23,625 for heads of household, and $15,750 for single filers and married individuals filing separately for 2025. These amounts will adjust annually for inflation.
A new deduction for auto loan interest allows filers to claim up to $10,000 through 2028 for qualified U.S.-assembled vehicles. The benefit phases out for individuals earning above $100,000 or couples above $200,000.
The law also introduces Trump Accounts, which provide a $1,000 government deposit for eligible children born between 2025 and 2028, with families able to contribute up to $5,000 annually.
On the business side, the legislation makes 100 percent bonus depreciation permanent and allows companies to immediately expense research and development costs, with some provisions applying retroactively to 2021.
What Gets Eliminated
Not all tax benefits survived. The law repeals clean energy credits established under the Inflation Reduction Act, including electric vehicle tax credits, which end September 30, 2025. Home energy efficiency credits also face elimination in 2026.
Opportunity Zones, which offered tax incentives for investments in economically distressed areas, become permanent under the new law but with changes. The current 8,764 designated zones expire December 31, 2026, with new selections beginning in July 2026. The law adds incentives for rural zone investments.
Planning for 2026 and Beyond
Some tax professionals said workers may choose to review Form W-4 withholding elections in 2026, particularly after changes in filing status or dependents.
“In paychecks that you receive for 2026, it reflects this new tax system with changes to the standard deduction and the child tax credit,” York said. York added that changes in personal circumstances can affect withholding and that some workers may adjust Form W-4 information.
Claiming deductions for tips, overtime, or auto loan interest generally depends on meeting eligibility rules and maintaining supporting records. Tips must appear on W-2 or 1099 forms, or be reported via Form 4137. The IRS has not yet issued complete guidance on all international rules and clean energy phaseouts.
The IRS provides refund delivery through direct deposit and offers the “Where’s My Refund?” tool for tracking refund status.
The 2026 filing season, which begins in January, will provide additional data on how the new provisions affect refund amounts, including whether the projected $3,800 average refund is reflected in IRS aggregate statistics.
Source
Why your tax refund could be much bigger this year than you expected | Business Insider