Market analysts and fiscal policy experts are signaling that 2026 will be a record-breaking year for the average tax refund. Beyond the SALT changes, new provisions like the “Senior Bonus” deduction and the reinstatement of broader Child Tax Credits are coming into play. Data from leading financial firms suggests that the average refund could easily exceed $3,800 this year, a nearly 30% jump from historical averages. This is not just a result of higher deductions, but also new exemptions for specific types of income.
One of the most impactful shifts is the new treatment of overtime pay and tips. Under the current rules, these earnings are now exempt from federal income tax for those earning under $150,000 annually. For service workers and blue-collar employees who logged heavy hours in late 2025, the impact is substantial. These individuals will see their tax liability drop toward the bottom of the bracket, often resulting in a full return of all federal taxes withheld on those specific earnings. This “story of relief” is specifically designed to target the middle and working classes who have struggled with the cost of living.
The 2026 tax season marks a pivotal moment for U.S. taxpayers as retroactive cuts from the OBBB legislation finally take full effect. For the first time in years, the “tax gap” for middle-class families is shrinking, particularly for those who reside in high-tax states. As households prepare their documentation for the 2025 tax year, the combination of federal legislative changes and aggressive income tax cuts across nine specific states is creating a “perfect storm” for liquidity. National news outlets are signaling that this could be the largest refund cycle in modern history, provided taxpayers understand how to navigate the new itemization rules.
How the $40,000 SALT deduction cap impacts your 2026 refund
The cornerstone of the current refund surge is the modification of the SALT deduction. Previously capped at $10,000 under the 2017 Tax Cuts and Jobs Act, the new limit of $40,000 allows taxpayers to deduct much more of what they pay in state and local taxes from their federal obligations. However, this benefit is specifically targeted. To take advantage of the higher cap, filers must choose to itemize their deductions rather than taking the standard deduction, which currently sits at $15,750 for single filers and $31,500 for married couples filing jointly.
Data indicates that the primary beneficiaries are households earning between $60,000 and $400,000 annually. For those earning above $500,000, the SALT deduction begins to phase out, ensuring the relief stays concentrated within the middle and upper-middle class. Because many taxpayers have not yet adjusted their withholding or anticipated these retroactive cuts, the IRS is expected to issue much larger checks than usual to reconcile the difference. Financial analysts suggest that the “surprise” factor of these refunds will be a major economic driver throughout the first half of 2026.
Nine States slashing income tax rates as of January 1
Beyond federal changes, a wave of state-level tax relief is hitting millions of Americans this year. Supported by budget surpluses and a shift in fiscal policy, nine states officially lowered their individual income tax rates on New Year’s Day. These cuts range from modest adjustments to significant percentage drops, allowing residents to keep more of their weekly paychecks. For example, Kentucky has reduced its rate from 4% to 3.5%, while Nebraska has made a substantial cut from 5.2% to 4.55%.Other states joining the trend include Georgia, which lowered its rate to 5.09%, and Ohio, which dropped to 2.75%. In states like North Carolina and Mississippi, the reductions to 3.99% and 4% respectively are part of a broader competitive trend to attract new residents and stimulate local business. While critics argue that these cuts could eventually impact public services, proponents point to the immediate increase in consumer spending power. For taxpayers in these regions, the combination of lower state withholding and a higher federal SALT cap creates a double-benefit scenario for their 2026 filings.
The potential end of federal income tax and the rise of tariffs
In a move that could redefine the American economy, President Trump has signaled a long-term goal of eliminating federal income tax entirely. During recent cabinet briefings, the administration proposed a shift toward a tariff-based revenue model. The theory suggests that by leveraging “enormous” revenue from import duties, the government could eventually phase out the traditional 1040 filing process. While economists remain divided on the feasibility of replacing $2.5 trillion in annual income tax revenue with tariffs, the administration remains vocal about the transition.
This potential overhaul would represent the most significant change to the U.S. tax code since the early 20th century. Current projections suggest that if tariff revenues continue to exceed expectations, they could not only lower tax burdens but also fund direct stimulus measures, such as the rumored $2,000 checks for 2026. For now, the administration describes the current income tax system as something that may soon be kept “only for fun” or at drastically reduced rates, as the country moves toward a protectionist financial strategy.
FAQs:
Q: How much extra could Americans get in 2026 tax refunds due to the SALT deduction change? A: Taxpayers may see at least $1,000 more on their 2025 tax returns because the SALT deduction cap increased from $10,000 to $40,000. The boost mainly benefits middle- and upper-middle income households earning $60,000–$400,000 who itemize deductions.
Q: Which states are cutting income taxes in 2026, and how does it affect refunds?
A: Nine states—Georgia, Indiana, Kentucky, Mississippi, Montana, Nebraska, North Carolina, Ohio, and Oklahoma—have lowered income tax rates, ranging from 0.15% to 0.65%. Combined with the SALT deduction changes, these cuts could increase take-home pay and result in larger refunds for residents.