Why 2026 is expected to be a tale of two tax seasons
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Tax refund season is expected to look K-shaped this year, with larger refunds flowing to higher-income filers while many lower earners see a smaller boost.
Why it matters: The administration is betting that its tax policies, and the influx of cash from refunds, will help juice consumer spending and keep the economy humming.
- But refunds tilted toward wealthier households could blunt that effect without improving poorer households' perception of the economy.
Driving the news: Bank of America Institute estimates this year's refunds could total about $65 billion more than last year's, an 18% increase, with most of the money set to be paid out between now and April.
- That is boosted by a slew of tax provisions contained in the Trump administration's signature One Big, Beautiful Bill Act, including a higher cap on state and local income tax deductibility, no tax on overtime or tips, and a larger standard deduction for seniors.
- But because those with more taxable income will benefit from those provisions, much of the windfall is expected to land with middle- and higher-income filers, even though most households receive refunds.
- That would be a shift from recent history: The bank says that year-over-year changes in tax refunds were more equitable across income groups, though higher-income households got a relatively bigger gain in 2024.
Between the lines: Lower-income households are disproportionately likely to have no federal income tax burden, meaning new tax deductions don't save them money.
- Many of the new provisions from the One Big, Beautiful Bill Act have income phaseouts, so the very richest households don't benefit, either. (The higher state and local deduction limit, for example, phases out for those with incomes over $500,000.)
- Rather, the mass affluent are the ones who stand to see bigger refunds from Uncle Sam in the coming weeks.
By the numbers: Retroactive provisions of President Trump's tax bill are expected to increase the average taxpayer's cash refund this year by around $750, lifting the typical refund to around $3,800 per filer, according to data crunched from Principal Asset Management.
- The middle 20% of households are expected to see after-tax income increase by roughly $600, while upper-middle-class households are estimated to see a hike of $1,400.
- By contrast, lower-income households will barely see any difference at all, with a roughly $130 lift relative to last year.
What they're saying: "This boost should reinforce the strength of consumer household spending power, particularly in the first half of the year," Christian Floro, a market strategist at Principal Asset Management, wrote in a recent note.
- But, Floro cautioned, "it will likely exacerbate the already widening 'K-shaped' divergence across consumers."
- "Indeed, lower-income consumers are facing an affordability challenge amid still-elevated inflation, a softening labor market, and limited participation in the positive wealth effects from the rising stock market."
The big picture: Consumer spending has been resilient, though some economists say wealthier consumers are responsible for keeping spending afloat even as lower-income consumers pull back. (Retail sales data for December is out tomorrow.)
- Higher prices and affordability concerns have wreaked havoc on consumer budgets, as confirmed by corporate anecdotes.
- PepsiCo, for instance, said last week that pressures among low- and middle-income shoppers have hurt demand for its snack products, forcing the company to slash prices.
Yes, but: BofA says that while higher-income households are expected to capture the biggest dollar gains from Trump's tax-cut legislation, the spending impact could be larger, relative to income, for lower-income households.
- The tax refunds "could still boost lower-income household spending — and take some pressure off their discretionary 'nice-to-have' spending budgets," BofA said in its report.
