Our U.S. Economist Heather Berger discusses how larger tax
refunds in 2026 could boost income and help support consumer
balance sheets throughout the year.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market and Happy New Year! I’m Heather
Berger, from Morgan Stanley’s US Economics Team. On today’s
episode – why U.S. consumers can expect higher tax refunds, and
what that means for the overall economy. It’s Friday, January
2nd, at 10am in New York.
As we kick off 2026, it’s not just a fresh start. It’s also the
time when tax refund season is right around the corner. For many
of us, those refunds aren’t just numbers on a page; they shape
the way we budget for many everyday expenses. The timing and size
of our refunds this year could make a real difference in how much
we’re able to save, spend, or get ahead on bills.
In the wake of the One Big Beautiful Bill Act, this year’s tax
refund season is shaping up to be bigger than usual. The new
fiscal bill packed in a variety of tax cuts for consumers. It
also included spending cuts to programs such as SNAP benefits and
Medicaid, but most of those cuts don’t pick up until later this
decade. Altogether, this means that we’ll likely see personal
incomes and spending power get a boost in 2026.
Many of the new deductions and tax credits for consumers in the
bill were made retroactive to the 2025 fiscal year. These
include deductions for tips and overtime, a higher child tax
credit, an increased senior deduction, and a higher cap on state
and local tax deductions, among others. The retroactive portion
of these measures should be reflected in tax refunds early this
year. Overall, we’re expecting these changes to increase refunds
by 15 to 20 percent on average. And different groups will benefit
from different parts of the bill. For example, the higher state
and local tax cap is likely to help high-income consumers the
most, while deductions for tips and overtime will be most
valuable to middle-income earners.
Historically, U.S. consumers receive about 30 to 45 percent of
tax refunds by the end of February, with then 60 to 70 percent
arriving by the end of March. Because of the new tax provisions,
we're anticipating a noticeable boost in personal income during
the first quarter of the year. While we do also expect this
legislation to encourage higher spending, it's unlikely that
we'll see spending rise as sharply as income right away.
According to surveys, most consumers say they use their refunds
mainly for saving or paying down debt. This can lead to healthier
balance sheets, which is shown by higher prepayment rates and
fewer loan delinquencies during the tax refund season.
When people choose to spend all or some of their tax refunds,
they typically put that money toward everyday needs, travel, new
clothes, or home improvements. Looking ahead, we do still see
some near-term headwinds to spending, such as expected increases
in inflation from tariffs and the expiration of the Affordable
Care Act credits, which will most affect low-income consumers. As
we progress throughout the year, though, we’re anticipating
steady growth in real consumer spending as the labor market
stabilizes, inflation decelerates, and lagged effects of easier
monetary policy flow through. On top of that, this year’s larger
tax refunds should give another lift to household spending.
The boost to spending, along with other corporate provisions in
the bill, should give the broader economy a push this year too.
We expect the bill as a whole to support GDP growth in
2026. But it then becomes a drag on growth in later years
when more of the spending cuts take effect.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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