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President Trump’s bill included several provisions that would affect taxes in 2025. These included a larger standard deduction. A more generous maximum child tax credit. Increased limits on state and local tax deductions. New $6,000 tax break for seniors. and new deductions for things like auto loan interest, tip income, and overtime pay, among other things.
The Tax Foundation estimates that these provisions will reduce personal income taxes by $144 billion in 2025.
“Overall, we expect these changes to increase refunds by an average of 15% to 20%,” Morgan Stanley U.S. economist Heather Berger said on the firm’s “Thoughts on the Market” podcast on Jan. 2.
In 2025, the average refund for individual filers through Oct. 17 was $3,052, according to the IRS. The agency had issued about 102 million refunds by October 17, with about 60% of payments sent by March 28.
Expenses may increase due to large refunds
Some experts say that expanding tax refunds in 2026 could temporarily increase consumer spending.
“We expect it to be positive for consumption,” National Economic Council Director Kevin Hassett told CNBC’s “Squawk on the Streets” on Jan. 9.
But spending behavior varies by income, with higher-income households more likely to save their refunds, according to an Oct. 31 memo from Piper Sandler. Households with incomes between $30,000 and $60,000 typically spend about 30% of their refunds on discretionary purchases, compared to 15% for households with incomes of $100,000 or more, the paper said.
Impact of larger tax refunds on inflation
Some analysts say an even larger tax rebate in early 2026 could boost consumer demand and inflationary pressures.
“It could easily become inflationary,” said Jonathan Parker, an economist at the Massachusetts Institute of Technology who has studied consumer spending during past stimulus payment cycles.
Parker told CNBC that stimulus checks issued during the coronavirus pandemic are “certainly correlated” with higher inflation. Those payments, issued in 2020 and 2021, were a “contributing factor” to the size of the ensuing inflation boom, he said.
The consumer price index in June 2022 increased by 9.1% from the previous year, the fastest pace of inflation since November 1981.
Former Treasury Secretary Janet Yellen said in January 2025 that stimulus may have contributed “a little” to inflation. But there were also “major supply chain issues” that caused shortages of key products, she said.
Asked how a larger tax rebate in 2026 could affect prices and demand, Hassett told Squawk on the Street: “There’s a lot of supply coming back online, so I’m not really worried about the inflationary impact of that.”
