While families struggle with high gas prices in the wake of the Iran war, many American workers are getting help this year from an unlikely place: the Internal Revenue Service. Tax refunds from the IRS are up almost 14% from last year—another reason to file your taxes by Wednesday’s deadline, especially if you’re affected by a handful of changes to the tax code.
Last Summer, the One Big Beautiful Bill became law, preserving some tax cuts that would’ve expired but also introducing a few new tax cuts too. Because many of the law’s provisions were made retroactive for the entirety of 2025, these changes significantly reduced some Americans’ tax liabilities, resulting in today’s big refunds. In the current tax filing season, total refunds are up 13.6% from 2025 and up 19.4% from 2024. Some of this increase is just due to population growth and more refunds being filed, but the average refund is way up, too. It’s higher by 11.1% compared to last year and 15.4% compared to two years ago.
The increase is partly due to pro-work incentives from the One Big Beautiful Bill, like eliminating income tax on many Americans’ overtime pay and earnings from tips. As far as tax cuts go, these provisions are great examples of rewarding industrious activity and restoring positive incentives. Eliminating taxes on these kinds of income for many Americans creates a powerful incentive to work more hours, be more productive, and provide better service. Since economic growth is fundamentally about what we produce, these tax cuts encourage faster growth and a stronger economy overall.
This is especially true for lower- and middle-income families where half or more of their federal tax liability can come from overtime and tip income. Employees in manufacturing and food services, like bartenders and waitresses, are prime candidates to receive these benefits.
It’s worth emphasizing that these two changes in particular provide a powerful supply-side effect on the economy. While other tax cuts do not provide any good incentives—and sometimes create bad incentives—these two increase economic activity, which can actually end up generating more net revenue in the long run, courtesy of the Laffer Curve.
This tax season’s larger refunds are also being driven by a larger child tax credit, which is 10% higher than last year. Likewise, the standard deduction was increased ($1,000 for those filing as single and $2,000 for those married and filing jointly) above last year’s level. For those ages 65 and older, there was an additional $6,000 deduction added.
Additionally, there were numerous smaller changes made to the tax code, such as the deductibility of interest on car loans for new vehicles with a final assembly in North America. Put it all together, and the average refund this year has grown by more than one-tenth. The timing here is fortuitous because of the fallout from the war with Iran. Ever since the conflict began and global oil flows were disrupted, consumer prices have skyrocketed for gasoline, diesel, and other petroleum products. Ideally, consumers would be using their larger refunds to buy and invest more, but are instead using the extra cash to cope with higher prices.
Hopefully, the conflict in the Middle East will conclude shortly and prices will come back down to at least close to pre-war levels. Even better would be if Congress and the White House passed another reconciliation bill this year with more pre-work incentives to put more money back in people’s pockets and get the economy going again.
E.J. Antoni, Ph.D., is chief economist and the Richard Aster fellow at the Heritage Foundation, and a senior fellow at Unleash Prosperity.
Editor’s Note: Thanks to President Trump’s leadership and bold policies, America’s economy is back on track.
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