2026 Tax Refunds Could Trigger Next Wave of Economic Stimulus, J.P. Morgan Warns

Why Massive Returns Are Coming Your Way

J.P. Morgan Asset Management’s chief global strategist recently highlighted a fascinating—and potentially concerning—economic scenario unfolding in the months ahead. Taxpayers are bracing for substantially larger income tax refunds than usual, and one expert believes these payments will function as an unplanned economic stimulus package.

The core issue lies in retroactive tax legislation. When recent tax reforms took effect, they applied backward to income already earned in 2025. This means workers have been paying taxes all year at the old rate, even though new tax rules will ultimately reduce what they owe. The outcome? A tsunami of oversized refunds waiting to hit bank accounts in early 2026.

The Perfect Storm: Retroactive Changes and Unchanged Withholding

Several tax provisions changed retroactively without corresponding adjustments to payroll systems:

• Elimination of taxation on tips and overtime compensation
• Removal of tax burdens on car loan interest payments
• Enhanced deduction limits for state and local taxes
• Permanent expansion of standard deductions
• Increased child tax credits with retroactive application
• New deduction opportunities for retirees

Here’s where the administrative disconnect becomes critical: the IRS never updated the 2025 W-2 and 1099 forms that employers use to calculate withholding. Most workers never individually requested reduced withholding amounts from their employers. Consequently, companies continued extracting the same tax amounts from paychecks throughout 2025, despite knowing that filing taxes in 2026 would reveal significant overpayment.

The Scale of the Refund Wave

The numbers paint a striking picture of what’s coming. Analysis through mid-May suggests approximately 166 million individual income tax returns will process through the IRS. Among these, roughly 104 million taxpayers are projected to receive average refunds of $3,278 each.

For context, that’s substantially larger than typical refund amounts and approaches the scale of pandemic-era stimulus checks that fueled both consumer spending and inflationary pressures years ago.

Stimulus Effects and Economic Consequences

David Kelly’s assessment warns that these refunds will “function similarly to new stimulus payments, amplifying consumer spending and inflation pressures in early 2026.” The concern isn’t about taxpayers receiving their own money back—it’s about the concentrated timing and aggregate volume.

When millions of households simultaneously receive large lump sums, they typically increase spending immediately. This surge in demand can push prices upward precisely when inflation remains a sensitive economic issue. Historical precedent supports this worry: the three rounds of COVID-era stimulus checks, while economically necessary during lockdowns, contributed substantially to the inflation wave that followed.

More Stimulus May Be Coming

Kelly’s analysis doesn’t stop with tax refunds. He suggests policymakers might introduce additional direct payments if economic conditions deteriorate in mid-2026. Should tariff impacts or reduced immigration pressure the economy heading into an election year, lawmakers could authorize “tariff rebate checks” or other dividend payments to prevent recession.

This potential second wave would further amplify the stimulus-like effects already built into the refund scenario.

The Inflation Dilemma

Here lies the paradox: substantial refunds and potential additional payments sound beneficial for individual wallets, but the collective economic impact could prove problematic.

Concentrated stimulus-style payments historically intensify inflation, potentially prompting the Federal Reserve to maintain higher interest rates longer or delay additional rate cuts. Higher borrowing costs then ripple through consumer loans, mortgages, and business financing—offsetting the benefits individuals gain from refund windfalls.

The timing compounds the concern. Early 2026 inflation pressure arrives precisely when policymakers hoped economic momentum would stabilize without additional stimulus measures.

What This Means for Your Planning

The takeaway isn’t to avoid the refund—that’s your money, earned by your labor. Rather, it’s worth considering how to deploy these funds strategically. Lump-sum spending that drives demand directly into inflationary pressure works against your long-term purchasing power.

Financially sophisticated households might consider saving substantial portions or using refunds for debt reduction rather than consumption, thereby minimizing personal contribution to demand-driven inflation.

The J.P. Morgan analysis underscores a fundamental economic tension: short-term consumer relief often conflicts with long-term price stability. As 2026 approaches, that tension will play out in real time.