Persistent inflation could unexpectedly drive 2026 tax refunds to new heights, as automatic cost-of-living adjustments and the expansion of refundable credits come into play.
With tax brackets and standard deductions climbing in response to inflation, middle-income households might see their tax burdens decrease, leading to potentially larger refunds. Additionally, expanded tax credits could further boost household reimbursements without any additional effort required from taxpayers.
How Inflation Adjustments Impact Your Tax Refund
Inflation-driven adjustments to tax brackets are a significant factor in increasing tax refunds. As these brackets shift upward to account for rising costs, many taxpayers who would otherwise fall into higher tax rates may find themselves moved into lower-rate brackets.
Similarly, the standard deduction’s quiet increase compounds this effect, providing more tax relief for households. This dual impact could lead to unexpected boosts in refunds as middle-income earnings are taxed at lower rates.
The Role of Refundable Tax Credits in 2026
Refundable tax credits, especially the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), will also see increases in line with inflation. These credits provide direct refunds to eligible households, potentially resulting in larger reimbursements.
If Congress takes additional action to expand these provisions before 2026, taxpayers may find themselves receiving unprecedented refund amounts, with no additional action required on their part.
2026 Tax Shockwave: The Return of Pre-2018 Deductions
December 2025 marks the expiration of key provisions from the Tax Cuts and Jobs Act (TCJA), leading to significant changes in tax law. One of the most noteworthy is the potential return of pre-2018 deductions, including the full state and local tax (SALT) break.
The $10,000 cap on SALT deductions, which was a major point of contention in the TCJA, could vanish entirely, allowing taxpayers in high-tax states like Illinois and Massachusetts to deduct much higher amounts.
For example, a nurse in Chicago or a technician in Boston may be able to deduct up to $19,000 instead of the previous $10,000 cap, which could lead to substantial repayment surprises.
How Capitol Hill’s Actions Can Affect Your Refund
Capitol Hill’s tendency to attach last-minute tax incentives to must-pass legislation, especially as the expiration of the TCJA provisions approaches, further adds to the potential for increased refunds.
These last-minute changes could introduce additional credits, deductions, or other relief measures that would benefit taxpayers, potentially increasing the size of refunds for many.
The IRS’s Smarter Systems: Faster Refunds
Thanks to funding from the Inflation Reduction Act, the IRS has been upgrading its technology systems. These improvements allow the agency to detect over-withholding from employers more quickly.
In many cases, employers are playing it overly safe, withholding additional taxes from employees in 2025 “just in case” due to the redesigned W-4 form.
While this may cause employees to see higher withholding amounts, it also means that refunds will likely be issued more quickly, putting taxpayers’ money back in their pockets sooner.
The Three Major Refund Boosters in 2026
As we look ahead to 2026, three main factors are likely to contribute to higher tax refunds:
- Inflation Adjustments: These will nudge taxpayers into lower tax brackets and provide additional relief through higher standard deductions.
- Return of Old Deductions: If provisions like the SALT cap are lifted, many high-tax state residents will see significant increases in their deductions.
- Smarter IRS Systems: Improved IRS technology will help catch over-withholding faster, leading to quicker refunds.
The History of IRS Tax Refund Averages
The average IRS tax refund has fluctuated over the years due to changes in tax laws, economic conditions, and taxpayer behavior. Here’s a look at recent trends:
2020: The average refund was $2,865, influenced by pandemic-related relief measures such as stimulus payments and expanded tax credits.
2021: The average peaked at $3,012, driven by enhanced Child Tax Credits and other COVID-19 relief provisions.
2022: The average refund rose to $3,252, reflecting the continued economic recovery and changes in withholding.
2023: The average dipped slightly to $3,167, reflecting the expiration of pandemic-era credits.
2024: The average settled at $3,138, with changes in tax laws and individual financial decisions affecting refunds.
2025 (Early Data): By May 9, 2025, the average refund was $2,939, a 2.4% increase from the same point in 2024, though this may change as late filers submit their returns.
These variations demonstrate how changes in tax policy, economic recovery, and individual tax behaviors shape refund amounts from year to year.
As 2026 approaches, a combination of inflation adjustments, the potential return of certain tax deductions, and the IRS’s more efficient systems could lead to substantial increases in tax refunds for many taxpayers.
These factors, combined with the expiration of key provisions from the Tax Cuts and Jobs Act, create a perfect storm for higher-than-expected refunds in 2026.
