Why Many US Taxpayers May Receive Higher Refunds in Early 2026 ?

Many US taxpayers may see larger-than-usual tax refunds in the first quarter of 2026. This is largely due to changes in tax rules that came into effect during 2025, which reduced taxable income for certain groups. Because most people did not adjust their paycheck withholdings to reflect these changes, they may have overpaid taxes during the year.

One of the key groups affected is workers who earn tips. A new provision allows eligible individuals to deduct up to $25,000 of tipped income when filing their 2025 tax return. Since this deduction is applied at filing time and not during payroll withholding, many tipped workers may discover they paid more tax than necessary throughout the year.

Similarly, employees who received overtime pay may qualify for a new deduction. Individuals can deduct up to $12,500 of eligible overtime income for 2025, while joint filers can deduct up to $25,000. As with tipped income, most employers did not adjust withholding calculations during the year, which may result in refunds for workers who earned overtime pay.

There are important limitations to note. These deductions generally phase out for individuals earning more than $150,000. State and local taxes may still apply, and employment taxes such as Social Security and Medicare are not affected. In addition, only specific portions of overtime pay qualify for the deduction—typically the difference between the regular hourly rate and the overtime premium. Taxpayers are responsible for ensuring these amounts are calculated correctly when filing.

Other taxpayers may also benefit from updated deductions. Older adults may receive an additional deduction beyond the standard amount, subject to eligibility rules. Small business owners may see increased deductions for first-year depreciation and research-related expenses. Contribution limits have also increased for certain savings tools, including flexible spending accounts and specific long-term savings accounts designed for children.

Because these tax benefits are ongoing rather than one-time adjustments, taxpayers who receive refunds may want to review and update their withholding for 2026. Doing so can increase take-home pay during the year instead of waiting for a refund at tax time.

While the legislation behind these changes has been widely debated, the tax provisions are currently in effect. Eligible taxpayers may benefit by filing their 2025 returns promptly and ensuring they take advantage of applicable deductions. For many, refunds issued in early 2026 may simply represent taxes that were overpaid during the year.