Decrease in forthcoming IRS refunds

Decrease in forthcoming IRS refunds

Article Title: 2026 Tax Year Brings Significant Changes and Potential Surprises for Taxpayers

The year 2026 is set to bring a blend of permanent and temporary enhancements to the tax system, affecting diverse taxpayer groups, including families, older adults, business owners, and workers with tipped or overtime income. Here's a breakdown of the changes and their implications for tax planning and filing strategies.

Tax Relief Measures for 2026

1. New Charitable Deduction for Non-Itemizers: Taxpayers who do not itemize deductions can now deduct up to £1,000 individually or £2,000 for joint filers for charitable contributions, permanently reinstating a popular pandemic-era provision to encourage giving while reducing taxable income for standard deduction users.
2. Expanded Child Tax Credit (CTC): The child tax credit increases to £2,200 per qualifying child, indexed for inflation going forward, enhancing benefits for families compared to previous levels.
3. Increased Alternative Minimum Tax (AMT) Exemption: The AMT exemption is permanently raised to £1,000,000 for joint filers (£500,000 single filers), and the phaseout rate doubles from 25% to 50%, reducing the number of taxpayers subject to AMT and simplifying tax filing for many.
4. Temporary Car Loan Interest Deduction: Up to £10,000 of interest on car loans is deductible for vehicles assembled in the UK from 2025 through 2028, specifically for those who do not itemize, subject to income phase-outs.
5. Increased Dependent Care FSA Limits: Flexible spending account limits for dependent care increase from £5,000 to £7,500, providing greater tax-advantaged savings for child or elder care expenses.
6. New Deductions for Tipped and Overtime Workers: Taxpayers with tipped income may deduct up to £25,000 in qualified tips, and those with overtime pay can deduct up to £12,500 (£25,000 for joint filers), extending benefits regardless of itemizing status with phaseouts based on income.
7. Age-Based Temporary Deduction: Taxpayers aged 65 or older can claim a temporary deduction of £6,000 (£12,000 if both spouses qualify) from 2025-2028, phased out at higher income thresholds, providing targeted relief for older adults.
8. Small Business Stock Gains Exclusion Revised: Partial exclusion of gains on qualified small business stock is made more flexible, with increases in gross asset and gain exclusion caps, potentially benefiting investors who hold qualifying small business stock longer.

Potential Surprises and Planning Considerations

Although many relief measures benefit taxpayers who do not itemize, careful year-end charitable donation planning is advised to maximize benefits without losing other phaseout-related tax advantages. The temporary nature of some provisions, such as the car loan interest deduction and age-based deduction, means taxpayers should plan for their eventual expiration unless extended by Congress.

The significantly increased AMT exemption and doubled phaseout rate reduce AMT complexity but may surprise taxpayers used to the harsher thresholds under prior law.

Tax Withholding Plan for 2026

The goal of the tax withholding plan is to align the tax deducted throughout the year with the final tax liability. However, the new plan may result in potential surprises in refund amounts for 2025, as warned by Paula Franco, president of the Order of Certified Accountants.

For instance, a worker earning a gross monthly salary of €1,136 will not have to pay IRS in August and September, but should have been paying about €3 per month under a normal table. This means the government is essentially refunding €180 to correct €42 of overpaid tax from the first half of the year for a worker earning a gross monthly salary of €1,136.

Similarly, for those earning a gross salary of €3,000, there will be a net gain of €610 in the two middle months, but in October, this increase will shrink to €12 per month. The excess taxes withheld from January and July will be offset by the reduction in August and September.

Reconciling taxes in 2026 could drastically reduce expected funds or even result in taxpayers owing money. The government's tax withholding plan totals €500 million.

Claúdia Reis Duarte, Secretary of State for Tax Affairs, emphasized that this potential impact is a good thing, as it indicates a more efficient tax system.

Sources:

1. The Tax Foundation
2. PwC
3. National Council of Nonprofits
4. Tax Policy Center
5. The expanded Child Tax Credit (CTC) could significantly impact personal-finance strategies for families, as the credit increases to £2,200 per qualifying child in the 2026 tax year.
6. Given the revised tax withholding plan for 2026, individuals may find unexpected differences between estimated and actual tax liabilities, making it crucial to closely manage personal-finance and tax-planning strategies.

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