Economy

IRS Adjustments and New Legislation Expected to Impact 2026 Paychecks and Tax Refunds

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Jan 6, 2026

THE BARE STORY

The Internal Revenue Service (IRS) has released inflation-adjusted tax brackets for 2026, while separate legislation enacted by President Donald Trump in July is expected to impact tax refunds filed this year. In October, the IRS announced that income ranges for the two lowest tax brackets increased by approximately 4%, with higher brackets rising about 2.3%. Andrew Lautz of the Bipartisan Policy Center stated that once updated withholdings are implemented, workers with stable incomes will likely see slightly larger paychecks in 2026.

Experts also anticipate that many taxpayers may receive larger refunds when filing their 2025 returns in 2026. This projection stems from the July legislation, which introduced retroactive tax changes for the 2025 tax year. Because the IRS did not update employer withholding tables for 2025 to reflect these cuts, employee withholdings remained at pre-legislation rates. National Economic Council Director Kevin Hassett recently predicted the "biggest tax refund season of all time," and Garrett Watson of the Tax Foundation said he expects refunds to increase dramatically due to the unchanged withholding tables.

The legislation enacted in July permanently extended 2017 tax cuts and introduced new temporary measures. These changes increased the 2025 standard deduction to $15,750 for single filers and $31,500 for married couples filing jointly. The law also raised the maximum child tax credit to $2,200 and increased the state and local tax (SALT) deduction cap to $40,000 for 2025. Additional provisions include a new $6,000 deduction for seniors over age 65, as well as tax breaks for tip income, overtime pay, and auto loan interest.

Despite the adjustments, some experts noted that the impact on take-home pay might be offset by economic conditions. Watson described the tax bracket adjustments as a lagging measure, noting that the Bureau of Labor Statistics reported a 2.7% rise in the consumer price index for November 2025, a figure exceeding most of the 2026 bracket increases.

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Perspective by Claude

• Projection of historic tax refunds National Economic Council Director Kevin Hassett has predicted the "biggest tax refund season of all time" regarding 2025 returns filed in 2026. Garrett Watson of the Tax Foundation echoed this sentiment, stating that he expects refunds to increase dramatically following the retroactive application of recent legislative changes.

• Expansion of credits and deductions The legislation enacted in July permanently extended 2017 tax cuts and raised the standard deduction to $15,750 for single filers and $31,500 for married couples. It also introduced new relief measures, including a $6,000 deduction for seniors over 65, a higher maximum Child Tax Credit, and tax breaks for overtime, tips, and auto loan interest.

• Increases in expected take-home pay Andrew Lautz of the Bipartisan Policy Center stated that workers with stable incomes will likely see slightly larger paychecks in 2026 once updated withholdings are implemented. This change is supported by IRS adjustments that increased the income ranges for the two lowest tax brackets by approximately 4%.

How it may affect me

As a U.S. reader:

You may receive a significantly larger tax refund for the 2025 tax year because employer withholding tables remained at pre-legislation rates despite retroactive tax cuts.

If you earn a stable income, your 2026 paychecks will likely increase slightly due to IRS withholding updates and inflation adjustments raising lower tax brackets by approximately 4%.

Tax filers may claim increased standard deductions, a higher $40,000 SALT cap, and new breaks for seniors, overtime pay, tip income, and auto loan interest on 2025 returns.

Real purchasing power gains from increased pay may be limited, as recent inflation rates of 2.7% outpaced the 2.3% adjustment applied to higher income tax brackets.

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