During the COVID-19 pandemic, the government introduced unprecedented lockdown measures alongside a series of three stimulus check payments aimed at supporting households through economic uncertainty. These payments played a notable role in increasing personal savings rates at the time and have been linked by some analysts to the surge in inflation witnessed subsequently.
Looking ahead, renewed government-driven financial stimulus might emerge in an unanticipated form, diverging from direct stimulus checks. David Kelly, chief global strategist at J.P. Morgan Asset Management, addressed this prospect in an August LinkedIn post where he outlined how tax refunds scheduled for early 2026 could resemble previous stimulus distributions in their economic effects.
Kelly’s commentary centers on the expectation that Americans will receive significantly larger personal income tax refunds than initially projected—surpassing the predicted refunds tied to legislation passed under President Donald Trump.
The driving factor behind these substantial refunds is the enactment of multiple tax cuts effective retroactively, impacting income earned throughout 2025 despite the law’s passage occurring later in the year. This retroactive application means taxpayers have been subject to withholding based on outdated tax tables that did not reflect the new lower tax rates and deductions, naturally resulting in larger tax refunds once taxpayers file their returns.
Specifically, the revised tax code includes adjustments such as the elimination of taxes on tips, overtime pay, and car loan interest. It also introduces a new bonus deduction targeted at retirees, raises the permissible amount of state and local tax deductions, and institutes permanent increases to the standard deduction as well as the child tax credit. However, the IRS did not modify the 2025 version of W-2 or 1099 forms to incorporate these changes.
As a consequence, unless individual taxpayers requested employers to adjust tax withholdings, employers continued deducting taxes at prior rates, causing withheld amounts to exceed the new tax liabilities for many individuals. This dynamic is generating anticipation of a notable surge in average tax refunds when 2025 returns are filed in 2026.
Kelly forecasts that these sizeable refund payments will function analogously to a new wave of stimulus checks. He suggests the influx of cash into consumers’ hands could markedly enhance consumer spending power, thereby elevating demand and placing further upward pressure on inflation during the early part of next year.
Based on analysis of IRS tax return processing data up to mid-May, Kelly estimates that 166 million individual income tax returns are expected to be processed for the 2025 tax year. Out of these, 104 million taxpayers are likely to receive average refunds approximating $3,278 each. The total volume and size of these refunds underscore their potential impact on the broader economy.
Furthermore, Kelly speculates that stimulus measures might not conclude with these large tax refunds. Lawmakers might pursue additional direct financial interventions such as tariff rebate checks or even distribute dividends tied to cryptocurrency initiatives like DOGE. These actions would aim to counter anticipated economic slowdowns influenced by factors like tariffs and declining immigration levels, particularly as election periods approach.
While receiving such substantial refunds and possibly extra payments could appear beneficial to individuals’ immediate financial situations, this surge in disposable income carries broader economic risks. A significant increase in consumer demand, induced by these payments, might reignite inflationary trends that have troubled the economy since the pandemic-era stimulus distributions.
Elevated inflation would have cascading effects, potentially compelling the Federal Reserve to reconsider planned interest rate cuts. The central bank may need to maintain or raise rates to curb inflationary pressures, impacting borrowing costs and financial conditions.
In sum, although larger tax refunds and prospective supplemental payments could bolster consumer finances in the short term, the possible exacerbation of inflation and subsequent monetary policy challenges present substantial countervailing considerations for economic stability in the upcoming periods.