Bigger Federal Tax Refunds Coming In 2026, But Read The Fine Print On New Deductions

U.S. taxpayers will see several changes when they file their 2025 federal income tax returns, including a new deduction for older filers, an expanded child tax credit, a break for car loans, and new deductions for tips and certain overtime pay.

The budget reconciliation bill, or One Big Beautiful Bill Act, signed on July 4 by President Donald Trump both introduced new temporary tax deductions and made existing ones permanent, primarily for the 2025 through 2028 tax years. Some continue through the 2029 tax year.

The IRS won’t begin processing tax returns until Jan. 26, but the new breaks come with restrictions that may be difficult to understand and require careful review.

The tax breaks are expected to increase the size of refunds from the 2025 average of $3,025, but it could take longer to hit taxpayers’ bank accounts due to historic staffing lows at the IRS.

And speaking of bank accounts, if you’ve always received a check in the mail, the IRS is no longer issuing paper refund checks. Taxpayers will need to figure out a way to get a direct deposit before filing their refunds.

The various deductions generally aim to reduce the taxable income for qualifying individuals. Below are some things taxpayers should review before they file their returns. The deadline to file is Wednesday, April 15.

Big Increase In Standard Deduction

The standard deduction for the 2025 tax year is increased significantly due to inflation and a temporary 5 percent boost. It is now:

• $15,750 for single filers, a $1,150 jump from tax year 2024;
• $31,500 for married couples filing jointly, a $2,300 jump; and
• $23,625 for those filing as head of household, $1,725 jump.

The existing seven income brackets and rates (10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent) were made permanent. This provision of the Tax Cuts and Jobs Act of 2017 had been set to expire at the end of 2025.

Key Changes In Child Tax Credit

Big changes are in store for families claiming child tax credits, which are designed to offset the cost of raising children. Some families who have in the past relied on the credit may find they no longer qualify.

That’s because the Trump administration tightened eligibility requirements. All children were required to have Social Security Numbers to qualify for the tax credit in the 2017 Tax Cuts and Jobs Act, but now taxpayers, and their spouses if filing jointly, must also have valid Social Security numbers to claim it.

The change makes an estimated 1 million children ineligible for the credit.

At the same time, the value of the credit was increased, and income thresholds were expanded to allow higher earners to claim it.

For each qualifying child, filers can reduce their federal income tax bill by up to $2,200, an increase of $200 over tax year 2024.

Even those who aren’t required to file an income tax return because they don’t make enough money could receive up to $1,700 of that amount back as a tax refund, Kiplinger reported.

Called an Additional Child Tax Credit, this refundable portion is indexed to inflation but remains unchanged from the 2024 tax year.

Taxpayers earning up to $200,000 ($400,000 jointly) may qualify for the full child tax credit; the credit phases out entirely above these limits.

New Deduction For Older Taxpayers

Taxpayers who are 65 and older may qualify for an additional deduction of $6,000, or $12,000 for married couples if both spouses qualify. The deduction phases out for taxpayers with a modified adjusted gross income of $75,000 or more ($150,000 for joint filers).

This deduction, available to those who itemize and take the standard deduction, continues through tax year 2028.

To claim the deduction, use a new Schedule 1-A attachment to Form 1040.

Auto Loan Break For Some Cars

Most taxpayers who financed a new U.S.-assembled vehicle for personal use last year qualify for the new auto loan interest deduction of up to $10,000.

Tax filers don’t need to itemize to claim it. It’s an “above the line” deduction, meaning it reduces the adjusted gross income before standard or itemized deductions.

This deduction continues through tax year 2028.

To claim the deduction, use a new Schedule 1-A attachment to Form 1040.

How Are Tips Taxed?

Eligible workers can deduct up to $25,000 in qualified tips in a change that affects both itemizers and standard deduction filers.

The rules for this deduction are specific, and not every worker — nor every tip — qualifies, and despite the name of the “no tax on tips deduction,” tips aren’t necessarily completely tax-free.

Tipped workers must still report their tips to their employer and the IRS, and they’ll still pay Social Security and Medicare payroll taxes and any other applicable state or local taxes.

The IRS and Treasury published a proposed list of occupations that “customarily and regularly receive tips” to guide taxpayers. Those whose jobs aren’t on that list likely won’t qualify.

The deduction continues through tax year 2028. To claim the deduction, use a new Schedule 1-A attachment to Form 1040.

What Is The Overtime Deduction?

This deduction, which also continues through the 2028 tax year, allows eligible workers to deduct the premium portion of their overtime pay — that is, the extra half in “time-and-a-half — required by the Fair Labor Standards Act and reported on W-2 and 1099 forms.

Employers and other payors are required to file information returns with the IRS or Social Security Administration and provide statements to taxpayers showing the amount of qualified overtime paid during the year.

The maximum deduction is $12,500, or $25,000 for joint filers. The deduction phases out for taxpayers with modified adjusted gross incomes of $150,000 ($300,000 for joint filers).

To claim the deduction, use a new Schedule 1-A attachment to Form 1040.

Changes In SALT Deduction For Itemizers

Taxpayers who itemize can take advantage of the SALT deduction and subtract a portion of their state and local taxes from their federal adjusted gross income and lower their overall tax obligation. The cap was temporarily increased to $40,000 for most filers, up from the previous $10,000 limit.

The deduction generally applies to state and local income taxes, real estate taxes and personal property taxes.

This temporary cap through tax year 2029 increases by 1 percent annually until it expires in 2030 and reverts back to the original $10,000 limit.

These Tax Credits Are Often Overlooked

Taxpayers can shave dollars off their tax bills by taking advantage of certain credits.

“The IRS reports every year that 1 out of 5 people missed the earned income tax credit and also the retirement saver’s credit,” Lisa Greene-Lewis, CPA and tax expert at Intuit TurboTax said in a video. “So the earned income tax credit, that is a credit for a family with three kids that can be up to $8,046. So that is a lot of money.”

This credit for low- to moderate income working individuals and families reduces taxes owed and can provide a significant refund, even for those who do not owe taxes, by returning money at tax time. To qualify, filers must have earned income, have a valid Social Security number, and meet income limits, with higher credits available for those with children.

Another sometimes overlooked savings is the enhanced adoption credit of up to $5,000.

Some other tax credits, such as the clean vehicle and home energy credits, expired in 2025 but may be claimed, depending on when the vehicle was purchased or the home modification occurred.

Action Needed On ‘Trump Accounts’ For Babies

Taxpayers taking advantage of the so-called “Trump accounts for babies” must file IRS Form 4547 along with their 2025 returns to open accounts for children who are eligible for the $1,000 government deposit and tax-advantaged savings plan.

Eligible children in the initial year of the plan are those born between Jan. 1 and Dec. 31, 2025, who have a Social Security number. The one-time $1,000 government contribution will go into accounts in July, and parents or guardians can make additional contributions of up to $5,000 annually

• Related: What To Know About ‘Trump Accounts For Babies’ Born In 2025