How New Tax Breaks Might Impact Your 2026 Refund

Key Changes in Federal Tax Provisions for 2025

As the April 15 tax filing deadline approaches, Americans are seeing new federal tax changes that could impact their refunds. These updates, introduced under the One Big Beautiful Bill Act (OBBBA), affect income earned in 2025 and are already leading to larger refunds than usual.

Understanding the New Deductions

The “no tax on tips” and “no tax on overtime” provisions under the OBBBA are often misunderstood as eliminating taxes entirely. In reality, they function as targeted federal income tax deductions. This means eligible workers can reduce the amount of income subject to federal tax, rather than avoiding tax on that income altogether. Payroll taxes such as Social Security and Medicare still apply, and state taxes may also be owed depending on where a person lives.

Under the tips provision, workers in occupations where tipping is customary can deduct up to $25,000 in qualifying tip income each year. This includes voluntary tips received directly from customers, whether paid in cash or by card, as well as tips distributed through pooling arrangements. However, mandatory service charges or similar fees do not qualify. Eligibility is also subject to income limits, with the full deduction available to single filers earning up to $150,000 and married couples earning up to $300,000, before gradually phasing out at higher income levels.

The overtime provision works somewhat differently and is more limited than it may first appear. While it allows a deduction of up to $12,500 for single filers, or $25,000 for joint filers, it applies only to the “premium” portion of overtime pay—the additional half of “time-and-a-half” earnings—rather than the full overtime wage. For example, if a worker earns $20 per hour and $30 per hour in overtime, only the extra $10 per hour would count toward the deduction. The same income thresholds apply, meaning the benefit is reduced or eliminated for higher earners.

Additional Tax Breaks Introduced by OBBBA

The OBBBA also introduced several other targeted tax breaks alongside the tips and overtime provisions:

• Child Tax Credit expansion: The law increases the value of the federal Child Tax Credit and expands eligibility, allowing more families to claim a larger credit per qualifying child, with income phaseouts determining the final amount received.
• Senior deduction: Taxpayers aged 65 and older can claim an additional $6,000 standard deduction per year ($12,000 for married couples filing jointly if both qualify), with the full amount available below set income thresholds and phasing out at higher earnings.
• Car loan interest deduction: Taxpayers can deduct up to $10,000 in interest paid on qualifying auto loans, subject to income limits and eligibility requirements tied to the purchase.

These provisions are temporary and apply to income earned between 2025 and 2028, meaning they first affect tax returns filed in 2026.

Refunds on the Rise

Early data suggests these changes may already be increasing refunds. As of mid-March, the average refund stood at $3,623, which is about 10.8 percent higher than the same point last year when it was $3,271, according to the IRS. That marks a notable jump compared to the 0.9 percent increase seen for the full 2025 filing season, which covered the 2024 tax year returns, which averaged $3,167, up from the $3,138 average in the 2024 season.

Nearly half of expected returns have already been submitted, and a significant share are making use of the new provisions. Treasury Department figures show that, as of March 8, 45 percent of filers had claimed at least one of the new tax breaks. This includes 3.5 million using the tip deduction, 15.5 million using the overtime deduction, and 9.5 million making use of the additional seniors deduction.

The White House has projected that the changes could increase average refunds by “$1,000 or more this year,” though the final impact will become clearer as more returns are processed.

New Rules, New Responsibilities

While the filing process itself remains largely unchanged, the new deductions come with added complexity for some taxpayers. In particular, workers claiming deductions for tips or overtime may need to take extra steps to document their income.

John Werlhof, principal at tax firm CLA, told Jendela Magazine that reporting requirements have not yet caught up with the changes. “For 2025, employers are not required to separately report the amount of overtime premiums or tips, so employees will need to track and substantiate these figures on their own,” he said.

He also warned that income-based phaseouts could affect eligibility. “These deductions are subject to income-based phaseouts, which means relatively small changes in income can affect eligibility or the size of the deduction,” Werlhof said, adding that this makes planning more important, particularly for those with fluctuating earnings.

Although the updates are unlikely to significantly lengthen the filing process for most people, Werlhof cautioned that they “do increase the risk of errors and missed opportunities.”