The IRS recently announced that many Americans might expect a larger tax refund next year, due in part to the tax cuts incorporated in President Trump’s major legislation.
Why does this matter?
This legislation, which Trump enacted last month, entails significant shifts in U.S. tax regulations, including measures aimed at eliminating wage taxes on overtime pay. However, this has posed some difficulties for employers who need to withhold taxes on these earnings. On Thursday, the IRS clarified that withholding rates will stay the same for now, indicating that they require more time to adjust to the new legislation.
What’s the update?
The IRS stated that “as part of the gradual rollout of this major legislation, there will be no alterations to specific information returns or withholding tables for the 2025 tax year.”
“These choices aim to prevent confusion during tax season and provide sufficient time for the IRS, businesses, and tax professionals to effectively implement the necessary changes,” the announcement explained.
This essentially means Americans will still need to pay taxes on tips and overtime for the time being. However, experts have indicated that these amounts will eventually be factored into their tax refunds. Newsweek reported.
“Individuals impacted by these changes can expect a refund higher than average due to additional withholdings, but this doesn’t help them in the short term,” noted a segment from the 9 Innings Podcast, as shared by Newsweek.
Additionally, complete tax reforms might necessitate some taxpayers to hire a CPA, resulting in further costs to retrieve their rightful amounts, Thompson pointed out.
Nothing will really change for these workers until the IRS updates the W-2 forms, which is anticipated to happen in 2026. “Meanwhile, each pay period will continue to have deductions from paychecks,” said an expert.
Christina Lewen, an accounting professor at North Carolina State University, also shared insights with Newsweek. She remarked, “It’s not unexpected if this is extended, considering the context.” She added, “I’m not entirely sure how it will unfold next year. It seems like they might be delaying it, but this could end up never being addressed for withholding.”
If individuals opt for standard withholding, taxes will keep being withheld as they typically would, meaning they’ll receive a refund once they file their tax returns.
Lewellen suggested that eligible taxpayers should file as quickly as possible to expedite receiving their refunds next year.
Garrett Watson, who directs policy analysis at the Tax Foundation, commented to Newsweek: “This announcement primarily reassures taxpayers regarding potential changes in withholding and information reporting in the near future.”
Moreover, part of the delay can be attributed to the need for the IRS and the Treasury Department to distinctly manage eligible overtime deductions in their reporting and withholding processes.
What’s the general consensus?
Watson emphasized: “Taxpayers who qualify for overtime and tip deductions won’t see immediate gains in 2025 from reduced withholdings reflecting these new deductions. Instead, they’ll reap the full benefits when they finalize their federal tax returns next spring.”
He mentioned that this period will serve as a temporary transition phase, with adjustments to withholding anticipated to start in 2026. “Given this decision, we are likely to observe larger-than-average refunds for qualifying taxpayers,” he added.
The IRS stated in their announcement: “We are in the process of developing new guidance and updating forms for the 2026 tax year, which includes modifications on how overtime pay is reported. We are collaborating with employers, pay providers, and tax professionals to ensure a seamless transition.”
What’s next?
The IRS indicated that additional information will be released in the coming months about how taxpayers can submit claims related to this major legislation when filing their returns.
“The Treasury and the IRS are preparing further guidance for both reporting companies and individual taxpayers,” the announcement concluded.
