You Can Kiss a Larger 2025 Tax Refund Goodbye

Refunds for the 2025 tax year are shaping up to come in much higher than the previous year. President Donald Trump's blockbuster legislation, the One Big Beautiful Bill (OBBB), which Congress passed last year, had made the temporary tax cuts imposed in 2017 permanent. It also added many new, additional permanent and temporary tax cuts that were already beginning to boost 2025 tax refunds.

Unfortunately, the conflict in Iran may offset the benefits. You can kiss your larger 2025 tax refund goodbye.

Higher oil prices will offset OBBB benefits

The OBBB benefits implemented many provisions expected to greatly help taxpayers. For instance, it significantly expanded the State and Local Tax (SALT) deduction and added a bonus senior tax deduction, giving qualifying people age 65 and over an additional $6,000 write-off that couples filing jointly could each claim. The standard deduction also increased for tax year 2025.

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While there are various estimates regarding the overall benefits from OBBB, depending on who you ask, the nonpartisan Tax Foundation estimated an average refund of $3,800 for the 2025 tax year, up nearly $750 from the 2024 tax year.

However, taxpayers may not get to enjoy the higher returns. The conflict in Iran has sent oil prices surging, with prices rising above $100 per barrel on multiple occasions. Oil tankers have been reluctant to pass through the Strait of Hormuz, which normally carries one-fifth of the world's oil supply. More recently, energy assets have been damaged across various countries in the Middle East.

Recently, economists at the Stanford Institute for Economic Policy Research released a study, estimating the potential impact of higher oil prices on Americans' pocketbooks. The study uses the $750 estimate from the Tax Foundation as the OBBB benefit. They then use Brent crude oil futures estimates from Goldman Sachs to build a model that forecasts how higher oil prices will affect retail gasoline prices.

The study found that households could pay an extra $740 in additional gasoline costs this year. This number could also prove conservative. That's because Goldman's Brent crude price estimates assume the Strait of Hormuz will only be closed for three weeks, and the war is already three weeks old, with no clear end date yet.

In its analysis, Goldman assumes that if the war had only lasted three weeks, oil prices would have declined back to 50% of their pre-conflict prices by April and 85% by June.

Broader implications

The Stanford study may truly be conservative, not just because of the timeline, but also because of other impacts to the global energy supply chain, such as damage to energy assets in the Middle East.

For instance, Israel recently attacked Iran's South Pars natural gas field, which is the largest in the world. While it's different than gas, if there are supply chain disruptions among other energy sources, that could drive demand for all forms of power higher.

Iran bombed the Ras Laffan Industrial City, a massive liquified natural gas complex, taking about 17% of the complex's export capacity offline, which Qatari officials say could take five years to rebuild, according to NBC.

Higher energy prices are likely to raise U.S. inflation, at least in the near term, even as inflation remains above the Fed's 2% target. Even though energy is not measured as a part of core inflation, it still has a sweeping impact on the cost of just about everything for consumers and businesses alike.

It will likely be difficult for the Federal Reserve to lower rates while oil prices are this high, although Fed Chair Jerome Powell has acknowledged that no one really knows what the conflict's impact will be. However, the market now expects the Fed to make no rate cuts this year, down from previous estimates of two.

Not only can Americans kiss their higher tax refunds goodbye, but they seem likely to face higher prices in the near term.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.