IRS extra $775 refund comes with a disappointing catch

Tax refunds are averaging about $775 higher this filing season for Americans who claim the new deductions under the One Big Beautiful Bill Act (OBBBA). That sounds like a genuine windfall. 

IRS CEO Frank Bisignano told the House Ways and Means Committee on March 5 that more than four in 10 of the roughly 55 million returns filed so far include at least one of the new tax breaks, Newsweek reported, and refunds for those filers are materially larger.

The average refund across all filers has hit $3,742 as of late February, up more than 10% from the same point last year, according to IRS filing-season data.

The White House has called 2026 the largest tax refund season on record, but there’s a catch that’s easy to miss.

That extra money in your refund is not a bonus from the government; it’s your own cash being returned.

The $775 boost is real, but it’s not new money

When President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025, the legislation created several new above-the-line deductions, effective retroactive to January 1, 2025.

The Tax Foundation estimates the law reduced individual income taxes for 2025 by roughly $129 billion.

However, the IRS revealed in August 2025 that it would not update employer withholding tables for tax year 2025. That decision meant employers kept withholding federal income tax at the old, higher rates for the entire year, even though workers now owed less under the new law.

The result is a classic overpayment scenario. Your employer took out more than you actually owed, and now the IRS is returning the difference as a refund.

Financial planner Drew Powers of Powers Financial Group called it a “classic case of overpayment,” telling Newsweek that taxpayers who proactively adjusted their withholdings after the law passed will see a smaller refund bump.

The new OBBBA deductions are driving bigger refunds

Bisignano told lawmakers that four deductions, all reported on the new Schedule 1-A form, account for most of the increase in the refund, Deloitte’s tax@hand noted. About 43% of returns filed so far include at least one of these breaks, according to CNBC.

Key OBBBA deductions for 2025 returns include the following.

Overtime pay deduction: Workers can deduct the premium portion of overtime compensation, up to $12,500 for single filers ($25,000 for joint filers). This has been the most commonly claimed new deduction so far.Senior bonus deduction: Taxpayers age 65 and older can claim an additional $6,000 deduction ($12,000 for married couples where both qualify). This break is producing the largest individual refund increases, Bisignano said. It phases out at $75,000 MAGI for single filers and $150,000 for joint filers.Tip deduction: Workers can deduct up to $25,000 in qualified tip income. The Tax Policy Center estimates 5 to 10 million returns will claim this break.Auto loan interest deduction: Buyers of American-made vehicles can deduct up to $10,000 in qualified loan interest, with a phase-out beginning at $100,000 MAGI ($200,000 for joint filers).

The IRS reports that households with adjusted gross incomes below $100,000 are the primary beneficiaries of these new breaks.

If current trends continue, Bisignano said, the average refund boost for eligible filers could reach $1,000 by the end of tax season.

A bigger tax refund now could mean a smaller paycheck later

Here’s where most coverage of the $775 boost falls short. A larger refund does not mean you paid less in taxes overall. It means you gave the federal government an interest-free loan throughout 2025, and now you’re getting the overpayment back.

Kevin Thompson, CEO of 9i Capital Group, told Newsweek that the increase is partly driven by the higher standard deduction and a partially refundable child tax credit now set at $2,200 per qualifying child, with $1,700 refundable.

Families with children will see the most pronounced gains because credits reduce taxes dollar-for-dollar.

But the real catch is what happens next. Beginning in 2026, the IRS will adjust withholding tables to reflect the OBBBA’s tax cuts. That means less money withheld from each paycheck going forward.

If you do nothing and assume next year’s refund will be equally large, you could be in for a surprise.

What IRS tax changes mean in practical terms

Consider a worker who received a $775 higher refund this season. Spread across 26 biweekly pay periods, that’s roughly $30 over-withheld per paycheck. Once the withholding tables update, that $30 will show up in your paycheck instead of your refund. 

Your take-home pay goes up slightly, but your refund next year shrinks. If you’ve already built a habit of relying on a big refund for annual expenses such as insurance premiums, property taxes, or debt payments, the shift could leave you short.

Not every tax filer will see a bigger refund

The $775 average applies only to filers who claim at least one of the new OBBBA deductions. The roughly 57% of returns filed so far that do not include a Schedule 1-A are not part of that average.

Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek that filers who have not yet submitted their returns need to manage expectations. Some of the new breaks are limited to specific groups: overtime workers, tipped employees, seniors, and buyers of American-made cars.

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Salaried workers under age 65 who don’t receive tips and didn’t finance an American-made vehicle in 2025 likely won’t qualify for any of the four Schedule 1-A deductions.

Any increase in their refund, if any, will come primarily from the modestly higher standard deduction ($15,750 for single filers, $31,500 for married filing jointly) and the expanded child tax credit.

Lower-income households that already pay little or no federal income tax may see only modest gains. Lower-income filers could receive less than $100 in additional refund money, as News Nation Now reported, citing Principal Asset Management estimates.

Inflation has already eaten into the extra tax-refund cash

Even for filers who qualify, the $775 average gain may not stretch as far as it sounds. Drew Powers of Powers Financial Group made this point directly to Newsweek: While a bigger refund is welcome, most Americans will find the additional amount has already been offset by higher prices.

Inflation has slowed from its 2022–2023 highs, but prices have not come down. Grocery costs, housing expenses, and insurance premiums remain elevated compared to three years ago. A $775 refund increase translates to about $64 per month in purchasing power, meaningful but unlikely to reshape a household budget.

Thompson noted that retirees may be the exception. Some seniors are saving between $700 and $2,100 in taxes due to the new $6,000 senior deduction, a break that can provide more noticeable relief on a fixed income.

Three steps every filer should take before next tax season

The IRS has made it clear that withholding tables are being updated for 2026. That changes the calculus for anyone who enjoyed a larger refund this year.

Take these three steps to stay ahead.

Step 1: Update your W-4 now

The IRS encourages all taxpayers to review their withholding after receiving a refund. Use the IRS Tax Withholding Estimator to check whether your current withholding is still appropriate under the new rates.

If you over-withheld significantly in 2025, reducing your withholding will put more money in your pocket each pay period rather than waiting for a lump sum next spring.

Step 2: Don’t spend the refund as if it’s a bonus

Because this refund is a return of overpaid taxes, not new income, treat it accordingly. Financial advisors consistently recommend directing unexpected refund increases toward high-interest debt, emergency savings, or retirement contributions.

If you normally receive about $3,000 and this year you got $3,775, consider setting aside that $775 difference rather than inflating your spending.

Step 3: Check whether you’re actually claiming all eligible deductions

If you worked overtime, received tips, turned 65, or financed an American-made car in 2025, and your return does not include a Schedule 1-A, you may be leaving money on the table.

The new deductions are above-the-line, meaning you can claim them in addition to the standard deduction. The IRS has published FAQs on each provision, including the overtime deduction (FS-2026-01). If you’ve already filed without claiming an eligible deduction, you can file an amended return using Form 1040-X.

The broader risk most filers are overlooking

The 2026 refund season is unique because it combines the normal refund cycle with a one-time retroactive adjustment from a law that passed mid-year. That won’t repeat.

Once withholding tables catch up to the new tax rates, the gap between what’s withheld and what’s owed narrows. Average refunds should settle closer to historical norms.

For filers who don’t update their W-4, the risk runs in both directions. Some may under-withhold and face a balance due next April. Others may over-withhold again if they choose not to update their paperwork, effectively giving the government another interest-free loan.

A $775 increase in refunds is real and welcome. But it’s a one-time correction, not a recurring benefit. The filers who come out ahead are the ones who understand what the money actually represents and plan accordingly.

Related: Turning Your Refund into Financial Progress

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