Why 2025 Tax Refunds May Be Higher
If you’re filing your 2025 tax return in early 2026, you may notice your refund looks larger than expected. One reason may be the One Big Beautiful Bill Act (OBBBA), signed into law in July of 2025. This legislation made several Tax Cuts and Jobs Act (TCJA) elements permanent while introducing new deductions and enhancements that lower taxable income or boost credits for the 2025 tax year.
Not everyone will qualify for every provision, and many benefits have income limits or phaseouts. Still, these are some of the most common reasons refunds could increase for the 2025 tax year.
- For tax years 2025 through 2028, seniors age 65 and older may qualify for an additional $6,000 deduction. This enhanced deduction is available whether you itemize or take the standard deduction, and it phases out at higher income levels.
- Families can benefit from an increased Child Tax Credit, now up to $2,200 per qualifying child, with portions refundable, potentially adding hundreds or thousands to refunds for parents.
- The state and local tax (SALT) deduction cap rose significantly to $40,000 (from $10,000) for many filers, potentially benefiting those in high-tax areas who itemize.
- For 2025 through 2028, eligible workers may be able to deduct:
- Qualified tip income, up to $25,000, with income phaseouts and eligibility rules
- Qualified overtime pay, up to $12,500 for the premium portion (or $25,000 for joint filers), also with income phaseouts
Many of these deductions have specific requirements, making it valuable to consult a tax professional. They can help confirm eligibility and evaluate options based on your specific financial situation.
How To Allocate Your 2025 Tax Refund
A bigger tax refund can feel like a financial win, but it can also be easy to spend quickly without supporting your overall plan. With a little intention, your refund can help you make progress toward your goals rather than disappearing into everyday spending.
It can be helpful to think about your tax refund as a chance to first strengthen your financial foundation, then fund your future objectives. The framework below walks through a few practical places to consider allocating your refund.
1) Credit Card Debt
If you carry revolving credit card balances, this can be a helpful first place to look. High-interest rates (often 20%+) erode wealth at a rapid pace and can make it harder for your money to build momentum elsewhere. Reducing this balance can free up monthly cash flow and lower interest costs.
2) Short-Term Expenses
If you know you have larger expenses ahead, like car maintenance, medical bills, or home repairs, setting aside part of your refund in a savings account can help you cover them and avoid taking on future debt.
3) Emergency Fund
Consider using your refund to build or strengthen an emergency fund. Many people aim for 3-6 months of essential expenses, though the right target depends on your unique circumstances. Having this buffer can help you navigate job loss, illness, or other unexpected expenses without derailing your financial plan or relying on credit.
4) Retirement Account Contributions
If your employer offers a 401(k) match, consider using your refund to contribute enough to receive the full match. It is essentially additional compensation your employer provides when you contribute, and it can be an easy way to add momentum to your retirement savings.
5) Avoid Impulse Spending
Assuming it fits your budget, it’s okay to set aside a small portion of your refund to enjoy. The bigger risk is letting the rest quietly disappear into everyday spending without a plan. Before you spend it, decide what you want to accomplish, whether that is reducing debt, building savings, or supporting a longer-term goal, so it helps strengthen your financial plan instead of slipping away.
Bottom Line
Overall, experts estimate average tax cuts of around $600+, and because withholding tables were left unchanged post-legislation, some taxpayers may see refunds that are 15-20% higher than they expected. By taking a disciplined approach, your 2025 refund can serve as a steppingstone toward stronger finances, rather than a temporary boost.
The steps outlined above can serve as a helpful starting point; however, taxes and financial planning are highly personal. What works for one person may not be the best fit for you. Factors such as your income, filing status, benefits, debt, savings, and more all influence the right strategy for your situation. A qualified tax professional or a Certified Financial Planner® professional can help you understand how recent rule changes affect you and evaluate your options in the context of your overall goals and financial plan.
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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