In February, U.S. President Donald Trump highlighted this year’s tax refunds as significantly larger than before, attributing the increase to new individual tax breaks enacted in 2025. He encouraged taxpayers to remember him when the funds arrived, jokingly advising them not to spend it all at once. However, much of the additional refund money is being consumed by rising gasoline costs.
The tax breaks, part of last year’s Republican-backed legislation, include deductions on tips, Social Security retirement payments, overtime wages, car loan interest, and state and local taxes. Yet, escalating fuel prices are diminishing the impact of these benefits. Oil prices hovered near $100 per barrel on Friday amid a fragile ceasefire in the U.S.-Iran conflict, with talks ongoing in Islamabad. The Strait of Hormuz, a critical passage handling about 20% of global oil shipments, remains closed, exacerbating supply concerns.
Even if the strait reopens soon, the U.S. Energy Information Administration forecasts that fuel prices may continue rising for months, projecting Brent crude to average $96 per barrel this year. Rystad Energy estimates that damage to energy infrastructure in the Gulf region will cost at least $25 billion to repair, a figure likely to increase if attacks persist. This constrained energy supply suggests prolonged pressure at the pump, disproportionately affecting lower-income Americans who allocate a larger share of their income to gasoline.
Consumer prices in the U.S. surged by 0.9% in March, marking the largest monthly increase in nearly four years. This spike was primarily driven by record gasoline price hikes linked to global oil market volatility and ongoing tariff impacts. Rising costs for diesel, fertilizer, aluminum, and other goods influenced by the Middle East conflict are expected to further erode the value of tax refunds.
As of April 3, the average individual tax refund for the 2025 tax year rose by $346, or 11.1%, reaching $3,462 compared to the previous year. Estimates ahead of the April 15 filing deadline vary, with Morgan Stanley projecting an increase of $560, the Tax Foundation estimating $611, and the U.S. Treasury suggesting up to $1,000. Some of these gains may result from reduced income withholding or lower quarterly tax payments.
Economists at Stanford’s Institute for Economic Policy Research estimate that war-related price surges have increased Americans’ average annual gasoline expenses by $857. This projection, made on March 23 when Brent crude traded at $99 per barrel, assumed the Strait of Hormuz would reopen around April 10, which has yet to occur. Meanwhile, Democrats on the Joint Economic Committee estimate that Americans spent an additional $8.4 billion on gasoline during the first month of the Iran conflict, representing over a quarter of the $30.7 billion rise in total IRS individual refunds through early April.
Stanford economics professor Neale Mahoney noted that while the macroeconomic impact might be modest, the effect on household budgets is significant. Families anticipating larger refunds for vacations or home improvements may now reduce spending as they allocate more funds to fuel costs. Additionally, grocery prices are expected to climb due to higher expenses for diesel, fertilizer, jet fuel, and aluminum filtering through the supply chain.
What was intended as a modest economic stimulus is increasingly serving as a buffer against a deeper slowdown. Consequently, analysts are revising downward U.S. consumption and GDP growth forecasts by several tenths of a percentage point. Morgan Stanley now projects 2026 consumption growth to slow to 1.7% from 2.1% in 2025, with durable goods purchases most affected. Oxford Economics has cut its global GDP growth forecast for 2026 to 2.6% from 3.0%, well below recent trends.
Many of the tax breaks in the One Big Beautiful Bill Act, passed by the Republican-controlled Congress last year, took effect retroactively from the start of 2025. Most first-year benefits will appear as claimed income deductions. Several deductions, including those for tips, overtime, Social Security, and auto loan interest, apply regardless of whether taxpayers itemize or take the standard deduction, which itself increased by $1,150 for individual filers in 2025. This adjustment yields an average refund increase of $138 for those in the 12% tax bracket earning between $11,926 and $48,475.
Treasury Secretary Scott Bessent praised the overtime deduction as a “home run,” noting that 25% of filers claimed it. However, one of the largest benefits—a $30,000 increase in the deduction for state and local taxes paid—still requires itemizing, limiting its accessibility primarily to homeowners with mortgages or property taxes. the Tax Foundation, taxpayers with market incomes between $71,659 and $126,348—above 60% of earners—are more likely to retain some benefit from the tax breaks after accounting for higher fuel costs. Market income includes adjusted gross income, tax-exempt interest, employer-sponsored health and pension benefits, among other factors.
Notably, the Tax Foundation data also shows that the top 0.01% of earners, those making over $2.24 million, receive larger tax savings than individuals earning up to $37,486, highlighting the uneven distribution of benefits from the recent tax legislation.
