Tax refund season: Big and beautiful

Summary

• The tax policy changes enacted in the One Big Beautiful Bill Act (OBBBA) will generate a sizable boost to households' tax refunds in the 2026 filing season. Specifically, we look for the average refund size to rise to $3,750, up 18% from last year. An increase as large as 30% strikes us as plausible, though it is not our base case. We project total refunds to rise by roughly $80 billion this year.
• Refunds will be much larger than usual because many of the new deductions in the OBBBA, such as no tax on tip or overtime income, were made retroactive to the beginning of 2025, but the Internal Revenue Service (IRS) did not change its withholding tables at that time. This leaves most households in a position where they will need to use the annual tax filing process to "square up" with the federal government.
• The 2026 fiscal tailwind to households from OBBBA's tax cuts does not stop at larger refunds. For some households, OBBBA's policy changes will result in lower annual tax payments rather than larger refunds. In other words, the new tax cuts will reduce what they owe rather than boost what the government owes them.
• Furthermore, the IRS has adjusted the withholding tables for 2026, so impacted households will start to see higher take-home pay in their regular paychecks in addition to the catch-up effect from last year. We estimate the total reduction in household income taxes in 2026 from OBBBA's new provisions will be roughly $220 billion, or 0.7% of GDP.
• Not all of this after-tax income boost will translate into higher consumer spending. Households can also put the money toward savings or paying down debt. The distributional tables from the Joint Committee on Taxation suggest the structure of OBBBA's new tax cuts are generally tilted toward middle and upper-middle income households. We ultimately expect the reduction in household income taxes to boost consumer spending by roughly $90 billion this year. This translates to a boost of around 0.3% to 2026 GDP, something we've previously factored into our baseline economic forecast.
• The fiscal tailwind described above is one factor that gives us confidence in our above-consensus view on economic growth in 2026. It also should give the FOMC some confidence that, if the labor market can remain resilient a bit longer, the cumulative impact of fiscal stimulus, monetary policy easing and less restrictive trade policy should drive some labor market stabilization come the spring/summer.

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