President Donald Trump has made bold promises regarding significant tax refunds for Americans in the upcoming tax season. However, many filers, particularly those who need financial support the most, are likely to face disappointment as the reality of the tax cuts unfolds.
According to Adam Michel, director of tax policy studies at the Cato Institute, “Your sort of typical W-2 worker with no kids will see very little change year-over-year.” He estimates that slightly more than half of taxpayers fall into this category, highlighting a potential political challenge for congressional Republicans as they approach midterm elections amid rising affordability concerns.
Consumer sentiment is at a low point, with Americans expressing their worst views on personal finances since 2009. Wage growth has slowed significantly, and job prospects have dimmed, indicating a slowdown in the labor market. While wealthy taxpayers in high-tax states like California, New York, and New Jersey may benefit the most, the average worker is likely to see only minor increases that will not sufficiently address their financial worries.
Around a quarter of taxpayers are expected to claim an enhanced child tax credit, which could provide a maximum of $200 per child. Michel notes that fewer taxpayers will qualify for special categories that offer larger breaks, with approximately 13% eligible for the new senior deduction for those aged 65 and older, and about 12% able to deduct tips or overtime wages.
Uneven Tax Refund Distribution
Forecasts of an increase in the average tax refund for the coming year may mask the uneven distribution of new tax breaks embedded in Trump’s tax legislation. Michel estimates that taxpayers could see refunds around $1,000 higher than in previous years, with the average tax refund historically hovering around $3,000.
During a recent briefing, White House Press Secretary Karoline Leavitt emphasized these averages, stating, “Refunds could be about one-third larger than usual. So remember that the next time Democrats try to talk about affordability.” The new higher standard deduction is expected to provide tax savings ranging from less than $100 to a few hundred dollars more, depending on income levels. This higher standard deduction applies to all taxpayers who do not itemize deductions.
Notably, those who qualify for specific new tax breaks stand to gain significantly. For instance, taxpayers who can utilize the new $40,000 cap on state and local tax deductions, increased from a previous limit of $10,000, may shave thousands off their tax bills. “There will be substantially larger refunds for taxpayers who can enjoy those benefits — the tips, overtime, SALT deduction, auto loan interest deduction,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center. He cautioned that this represents a smaller portion of the population.
Implications of Tax Law Changes
Much of the new tax law’s $3.4 trillion price tag has been allocated to extending expiring tax breaks originally enacted in 2017. Many of the tax breaks are deductions, which lower taxable income rather than directly reducing tax liability. Thus, higher-income Americans benefit more from these deductions.
Brendan Novak, a senior policy analyst with the Penn Wharton Budget Model, explained, “One dollar of deduction is more valuable to someone who is richer than someone who is not making as much money.” Trump’s campaign promises regarding no tax on tips, overtime, and auto-loan interest were fulfilled through the establishment of new deductions, which disproportionately favor higher-income earners.
Analysis by the Penn Wharton Budget Model indicates that individuals in the top income fifth are poised to realize the most significant tax savings. Those earning between $376,000 and just below $960,000 are expected to receive an average tax cut of $2,585. In contrast, individuals in the middle income fifth, earning between $49,000 and $90,000, will see their after-tax income rise by an average of $650 due to the new tax cuts.
Taxpayers may collect their tax savings through refunds next year, largely because the administration opted to maintain outdated payroll withholding guidance. Although many of Trump’s tax cuts are retroactive to the beginning of 2025, the IRS did not adjust withholding tables to reflect lower tax bills. Consequently, most workers will receive their tax savings as a lump sum when filing their taxes, just before the midterm congressional elections.
“This means people will get that as a lump sum when they file their taxes,” Lautz noted, contrasting this approach with the typical spread of tax savings throughout the year via lower withholding. Such a method may obscure the true impact of the tax cuts, potentially influencing voter sentiment leading up to the elections.
