Tax Refunds Could Be Bigger Than Usual This Year
Tax Refunds Could Be Bigger Than Usual This Year — Here’s What You Should Know
- New tax deductions, such as SALT and standard deduction, can significantly reduce tax liability.
Tax-filing season is now underway and continues through April 15. While preparing a federal income tax return can feel like a chore, many Americans may be pleasantly surprised this year.
According to CNN and Yahoo Finance, refunds could be noticeably larger for many households—particularly if your income, filing status, and family situation haven’t changed much since 2024.
Why refunds may be bigger this year
Last year, the average tax refund issued through Dec. 26 was $3,167, according to IRS filing data. Looking ahead, the Treasury Department projects refunds will increase by an average of $1,000 per household for 2025.
Congress enacted several new and expanded tax breaks for the 2025 tax year under the One Big Beautiful Bill Act (OBBBA). The OBBBA tax law introduced a range of tax cuts that affected the amount of federal income tax Americans owed. Among these changes are a new deduction for seniors, deductions tied to overtime pay and tipped income, a deduction for interest on car loans, a higher standard deduction, and other provisions. Let’s go through them together.
The SALT deduction
One change that could impact a wide range of taxpayers is the state and local tax (SALT) deduction. Brian Kearns, CPA, CFP, founder and president of Haddam Road Tax and Consulting, explained to Yahoo Finance that the cap has been significantly increased. Previously, itemizing filers could deduct up to $10,000 in qualifying state and local taxes; now the limit is $40,000. The change is particularly beneficial for residents of high-tax states.
Although Congress introduced multiple tax adjustments for 2025—including deductions for car loan interest, tips, and overtime pay, as well as a $200-per-child increase in the child tax credit—the most significant effects on refunds are likely tied to expanded existing deductions and a new benefit for seniors.
A higher standard deduction
Most taxpayers take the standard deduction, which this year, Congress increased by $750 to $15,750 for single filers and by $1,500 to $31,500 for married couples filing jointly.
“This is the most broadly impactful change because it affects millions of filers across income levels and filing statuses. Even modest increases in the standard deduction translate directly into lower taxable income,” said Tom O’Saben, director of tax content for the National Association of Tax Professionals, while speaking to CNN.
A new senior deduction
Taxpayers aged 65 or older may qualify for a new $6,000 deduction, or $12,000 for joint filers, in addition to either the standard or itemized deduction, the IRS website notes. The benefit is income-restricted but potentially substantial.
“It can materially reduce tax liability,” O’Saben said. The AARP estimates more than 30 million seniors could benefit from this unique deduction.
Car loan interest deduction
If you purchased a new vehicle this year—such as a car, motorcycle, or van—for personal use and financed it with a loan, you may be able to deduct some of the interest you paid. But there’s an important catch: the vehicle must have completed its final stage of production in the United States. That information can be confirmed by checking the vehicle’s identification number (VIN).
The deduction is capped at $10,000 per year and is subject to income limits. If your modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for married couples filing jointly), the deduction begins to shrink. Once MAGI rises above $149,000 ($249,000 for joint filers), the deduction is no longer allowed.
Tax deduction for tips
The tax deduction on tips allows eligible workers to deduct some or all of their “qualified” tips, depending on their income level. The IRS notes that “qualified” tips are voluntary cash tips or charged tips received directly from customers or through tip-sharing arrangements in industries where tipping is customary.
Eligible workers can deduct up to $25,000 in tipped income, but only those with a MAGI below $150,000 ($300,000 for married couples filing jointly) will qualify for the full deduction. The benefit phases out at higher income levels.
Many tipped workers may see little or no benefit if they already owe minimal federal income tax. Middle-income earners who receive tips are the most likely to gain from the deduction. To claim this tax break, filers will need to complete a new IRS form, Schedule 1-A, according to draft guidance from the agency, CNN notes.
Tax deduction for overtime pay
There’s also a new tax deduction for overtime pay. The change allows for a deduction on a portion of “qualified” overtime pay—not the full amount. The deduction applies only to the overtime premium above a worker’s regular wage, and even then, it is limited. For example, if you normally earn $20 an hour and receive $30 for overtime, only $10 would be deductible. If overtime pay rises to $35 an hour, the deductible portion remains $10.
What counts as “qualified” overtime is determined by the Federal Labor Standards Act, not state or local rules or union contracts, O’Saben said. Generally, that means hours worked beyond 40 in a week, paid at no more than time-and-a-half.
There are also caps and income limits. Workers can deduct up to $12,500 in eligible overtime pay, or $25,000 for joint filers. The full deduction is available only to those with a MAGI below $150,000 ($300,000 for joint filers).
A reduced deduction may apply at higher income levels, but it is eliminated entirely once MAGI exceeds $275,000 ($550,000 for married couples). Like the tip deduction, claiming this benefit requires filing the new Schedule 1-A, based on draft IRS instructions.
A higher child tax credit
The OBBBA increased the maximum child tax credit to $2,200 per qualifying child, up from the $2,000 amount previously scheduled for this year. According to the IRS website, fliers may qualify for the Additional Child Tax Credit, up to $1,700 per qualifying child, depending on your income, but you must have earned income of at least $2,500 to be eligible for the ACTC.
The law also tightens eligibility requirements, including a requirement that both parents and qualifying children have Social Security numbers.
Why withholding matters
How much tax was withheld from paychecks in 2025 may also play a role in larger refunds. In any tax year, a refund occurs when you’ve paid more in taxes than you ultimately owe. This year, many taxpayers may owe less because of the way the new deductions were rolled out. When the OBBBA became law, IRS withholding tables were not immediately updated. As a result, some workers continued paying higher amounts throughout the year despite qualifying for additional deductions.
How refunds may vary
Now it’s important to note that individual results will differ. Higher-income households may see larger gains from deductions such as SALT, though some breaks are phased out by income. Lower-income filers with minimal tax liability may not see a major change.
Everyone’s situation is different.
“Any time you have changes, they mean different things for different people,” Damien Martin, a CPA and partner at EY Private Tax, noted. “Everybody’s situation is unique.” He mentioned that a smaller-than-expected refund doesn’t necessarily indicate a mistake. “It doesn’t necessarily mean it’s wrong if your answer is coming out different than other people’s, because there are a lot of variables that go into it.”
Taxpayers unsure what to expect may benefit from professional guidance with a CPA, Kearns added.
“This is going to be an interesting year. There are a lot of different things out there, some of which have never been done before. It’s new for everyone.”
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