Many taxpayers will get a tax windfall this year. The One Big Beautiful Bill Act (OB3), which was signed into law in July 2025, retroactively cut individual income taxes to January 2025. Many have pointed out that taxpayers who did not change their income tax withholding after the passage and paid too much over the course of the year will receive a larger-than-expected refund. Some estimate that, on top of the typical $3,000 refund, taxpayers will receive an additional ‘bump’ of about $1,000. In line with those estimates, we find that roughly 60 percent of tax units will receive an average 2025 tax cut of nearly $1,200. However, there is significant variation across tax units.
The OB3 included a handful of “retroactive” individual income tax cuts that are effective as of January 2025 (Table 1). These tax cuts include a modest boost to family tax policies such as the standard deduction and the Child Tax Credit, the introduction of Trump’s proposals to exempt overtime and tips, the senior deduction, and the deduction for auto loan interest, and a more generous state and local tax deduction limit. Finally, tax units with pass-through business income will benefit from retroactive expensing and the softening of the net interest deduction limitation.
Table 1: Major OBBBA Individual Income Tax Changes Effective in 2025
| Provision | OBBBA Provisions for 2025 | 2025 under TCJA | 2025 Revenue Effect (Billions of Dollars) |
| Standard Deduction | $15,000 for single filers and $30,000 for joint filers | $15, 750 for single filers and $31,500 for joint filers | -$18.3 |
| Child Tax Credit | $2,200 per child | $2,000 per child | -$8.9 |
| State and Local Tax Deduction (SALT) | capped at $40,000 for filers with AGI under $500,000 and phased out at 30 percent to $10,000 for taxpayers making over $500,000 | capped at $10,000 | -$32.2 |
| Additional Deductions for Seniors | $6,000 additional deduction for seniors age 65+, phasing out at six percent for taxpayers making more than $75,000 ($150,000 joint) | n/a | -$16.8 |
| Deduction for Overtime Income | up to $12,500 deduction in overtime compensation ($25,000 joint), phasing out at 10% for taxpayers earning $150,000 ($300,000 joint) | n/a | -$38.7 |
| Auto Loan Interest Deduction | up to $10,000 deduction for assembled-in-US vehicles, phasing out at 20 percent for taxpayers making $100,000 ($200,000 joint) | n/a | -$6.8 |
| Deduction for Tip Income | up to $25,000 deduction in tip income, phasing out at 10 percent for taxpayers earning $150,000 ($300,000 joint) | n/a | -$7.0 |
| Net Interest Deduction Limitation | soften the interest limitation to be EBITA based at 30 percent | EBIT based at 30 percent | -$0.5 |
| R&D Investment | Full expensing restored | five-year amortization for domestic R&D | -$15.6 |
| Bonus depreciation for qualified structure investment | 100 percent bonus depreciation restored, | 40 percent bonus depreciation | -$10.3 |
| Expensing for qualified structures | 100 percent for manufacturing structures | n/a | -$1.4 |
Source: Tax Foundation General Equilibrium Model, January 2026 and authors’ calculations Note: Adoption credit, Trump accounts, and change in 1099-K are excluded from our analysis due to limited tax revenue impact.
The combined retroactive provisions are projected to reduce total federal revenue by $155.5 billion. The single largest tax cut is the overtime income deduction, which will reduce revenue by $38.7 billion, followed by the SALT cap increase at $32 billion. The family tax provisions (standard deduction, child tax credit) and senior deduction will reduce revenue by a combined $44 billion. Finally, the business provisions will reduce individual income tax revenue by a total of $27 billion.
On net, 60.6 percent of tax units will benefit from these provisions in 2025. Those tax units will receive an average tax cut of $1,198. However, we estimate that there will be significant variation across the income distribution. The share of tax units that benefit and the average tax cut rises sharply with income. Among the bottom 20 percent of tax units, 21.4 percent will receive an average tax cut of $116.2 while 95 percent of middle-income tax units (40 percent-60 percent income quintile) will receive an average tax cut of $578.2. A smaller share (76.2 percent) of the highest income tax units (top 0.1 percent) will receive an average tax cut of $67,148.
Middle- and high-income tax units are more likely to receive larger tax cuts due to the structure of these provisions. Since most of the provisions are either deductions or exclusions, they only provide tax relief to tax units with positive income tax liability.
Business provisions account for $27.8 billion of these tax cuts for both high- and low-income tax units. Table 2 also shows the share of tax units receiving a tax cut and the average size of their tax cut, excluding business provisions. In the absence of these provisions, only 2.2 percent of the bottom 20 percent and 54.7 percent of the top 0.1 percent receive any tax cut. Notably, the average size of the tax cut for the very highest income taxpayers (those in the top 0.1 percent) drops from $67,148 to $1,594.9.
Furthermore, another $78 billion of these tax cuts are due to Trump’s campaign proposals: no taxes on tips, no taxes on overtime, the senior deduction, and the deduction for auto loan interest. A taxpayer with no business income who does not expect to qualify for any of the Trump campaign provisions will see a much smaller tax cut. Excluding these narrowly targeted provisions and business provisions reduces the average tax cut by a little more than half from $1,198.4 to $536.7 with middle-income tax units receiving roughly $228.9.
Table 2: Total Tax Cut and The Distribution of Tax Units with Tax Cut, Major OBBBA Individual Income Tax Changes Effective in 2025
Source: Tax Foundation General Equilibrium Model, January 2026 and authors’ calculations * Tax units with a tax cut of at least $10.
As noted above, these are estimates of total tax cuts in 2025, not estimates of how much actual refunds will increase for the 2026 filing season. The size of refunds will depend on both the tax cuts a taxpayer receives and the extent to which taxpayers adjusted their withholding in the last months of 2025. It is plausible that many individuals did not adjust withholding for many of these provisions, especially Trump’s campaign proposals, and will see refunds consistent with our estimates. Taxpayers who did adjust their withholding or made changes to quarterly estimates following the passage will see smaller increases in refunds.
Regardless, many taxpayers should expect higher-than-usual refunds in 2026. This is due to several tax cuts included in OB3 that apply to tax year 2025. However, the size of refunds will depend significantly on a taxpayer’s individual characteristics and whether they adjusted their withholding with some seeing no boost whatsoever.
