US taxpayers will have a “gigantic refund year in the first quarter” of 2026, the treasury secretary, Scott Bessent, recently said in an interview.
Given all the untruths that come out of the current administration, you wouldn’t be blamed if you don’t believe him. But you should. This year, there will be a significant amount of tax refunds. Why? Well, it’s not tariff cash. It’s because many people overpaid their taxes this year.
For example, service workers who receive tips will be getting refunds. Thanks to Donald Trump’s One Big Beautiful Bill Act (OBBBA), a new provision allows them to deduct up to $25,000 per individual for any tipped income they received during the year. But I bet even when the bill passed, few changed their withholdings to reflect this deduction. If you’re part of that group, then it’s very likely you had too much withheld … and paid too much tax. When you file your 2025 return between now and 15 April – and take advantage of this deduction – you’ll find out you owed less taxes than you estimated. Hence the refund.
The same goes for workers receiving overtime pay. There’s a new deduction that will allow individuals to deduct up to $12,500 of their overtime pay received in 2025 (it’s $25,000 for joint filers). Similarly for service workers, it’s a deduction you take when you file your 2025 returns. I’m betting if you received overtime during the year, your withholdings didn’t reflect that either. So you’ll probably be getting money back on the taxes you overpaid.
There are caveats. State and local taxes may both still apply. Employment taxes – social security and Medicare – aren’t affected. Both deductions start to phase out if you make more than $150,000. Not all tipped workers are eligible (here’s a list to check). Thanks to the shutdown, the IRS didn’t have time to update W-2 wage reporting forms to reflect these changes. And employers weren’t given much guidance as to how to calculate these amounts.
It’s not just people who received tips and overtime that have new tax benefits
For example, did you know that your overtime wage eligible for the deduction would only be the differential between your normal hourly rate and your overtime rate? So if you got paid time and a half for overtime and your normal rate is $20 an hour, you would receive $30 an hour – but your deduction is on the $10 difference. I’m not sure all employers will do these calculations correctly, so be careful – any mistakes are the taxpayer’s responsibility.
It’s not just people who received tips and overtime that have new tax benefits.
Older adults – subject to some limitations – will get an additional $6,000 deduction this year over and above their standard deduction. If you run a small business, you’ll receive higher deductions for first-year depreciation and research and development costs. If you haven’t taken advantage already, you can contribute more to a flexible savings account (which reduces your taxable income) and contribute up to $5,000 to a “Trump savings account” this year and annually, which, while not reducing your income, will allow your newborn to accrue earnings tax-free through the age of 18 and then withdraw the funds without penalty.
These deductions aren’t one-offs. Which is why it’s important that if you get a refund this year, make sure to adjust your withholdings for 2026 to reflect your updated taxable income for the current year. This way, you can increase your net pay and put more money in your pocket during the year instead of waiting until you file your 2026 returns in 2027.
There are many critics of the OBBBA and they legitimately argue that the bill has many downsides – increasing deficits, taking away critical benefits and reducing spending in needed areas are among the biggest. Those issues aside, the bill does include significant tax benefits for many, benefits that may hopefully make a difference to both consumers and the economy at large.
The OBBBA is law. However you feel about it, take advantage. File your 2025 tax returns as soon as possible. Get your refund. It’s your money.
