2025 Tax Refunds Could Deliver Stimulus-Like Boost to Consumer Spending, JPMorgan Strategist Warns

The Unexpected Windfall Coming in 2026

A top strategist from J.P. Morgan Asset Management recently highlighted an unusual economic phenomenon set to unfold next year: retroactive tax policy changes will trigger massive refunds for American taxpayers, potentially injecting stimulus-like liquidity into the economy during early 2026.

The mechanism behind these substantial refunds is straightforward. When President Trump’s tax legislation took effect, many provisions were applied retroactively to income earned in 2025. However, the IRS maintained standard W-2 and 1099 withholding amounts throughout the year, meaning employers continued deducting the same tax rates from paychecks despite the new law’s lower tax obligations. This mismatch between actual tax liability and amounts withheld will create widespread overpayments.

Which Tax Changes Are Driving the Refunds?

Several specific tax provisions contributed to this situation. The legislation eliminated taxation on tips and overtime income, reduced tax burdens on car loan interest, and introduced a new bonus deduction for retirees. Additionally, the state and local tax deduction cap was raised, while both the standard deduction and child tax credit saw permanent increases applied retroactively to 2025 earnings.

David Kelly, chief global strategist at J.P. Morgan Asset Management, emphasized that these refunds will “function similarly to pandemic-era stimulus checks, amplifying consumer spending and inflationary pressure during the early months of 2026.”

The Numbers Tell a Significant Story

The scale of anticipated refunds is substantial. Based on IRS data analysis through mid-May, approximately 166 million individual income tax returns are projected to be filed for the 2025 tax year. Of these, roughly 104 million taxpayers are expected to receive an average refund of $3,278 each. This aggregate dispersal of capital directly into household accounts mirrors the distributional effect of the COVID-era stimulus payments.

Potential Economic Consequences

While receiving thousands in unexpected tax refunds appears beneficial on the surface, Kelly cautions about broader economic implications. The sudden injection of cash could reignite consumer demand in ways that perpetuate inflationary pressures—echoing concerns that emerged following pandemic stimulus distributions. This demand surge, combined with anticipated tariff impacts and immigration policy shifts in the latter half of 2026, may compel lawmakers to authorize additional relief measures, such as tariff rebate payments or alternative stimulus vehicles, to prevent mid-year economic deterioration.

The cumulative effect of large-scale refunds followed by potential additional government payments could complicate Federal Reserve policy decisions, potentially influencing the trajectory of interest rate adjustments as policymakers weigh inflation concerns against economic growth.

Looking Beyond 2026

Kelly’s analysis suggests that further stimulus initiatives may materialize before year-end if economic conditions warrant. The 2025 stimulus checks equivalent—delivered through tax refunds rather than direct payments—represents a significant shift in how government economic support operates. While the immediate consumer benefit is clear, the long-term inflationary consequences and their ripple effects throughout the broader economy warrant careful monitoring.