Americans are set to receive a bigger refund when they file their taxes this year than they did in 2025 thanks to changes in the tax code.
Already, US households received an average federal tax refund of $3,742, up nearly 10.6% from the average refund a year ago, according to IRS data as of Feb. 27.
It’s a big deal: For tens of millions of Americans, the day their tax refund arrives is the biggest one-day cash flow they’ll see all year.
This massive influx of money has ripple effects throughout the entire economy, as Americans use the money to pay down debt, buy big-ticket items, and top up savings accounts.
But this year, experts say the economic fallout from the U.S.-Israeli war in Iran could derail any potential boost to the economy, which usually comes from consumers spending their tax refunds.
Since the start of the Iran war, oil prices have skyrocketed, causing gas and diesel prices to jump as well. On Friday, the average price of a gallon of unleaded gas in the US was $3.64, according to GasBuddy’s live tracker. That’s about $0.72 higher than last month’s average price.
“When war drives oil up, it’s not just a gasoline story,” said Paul Dietrich, chief investment strategist at Wedbush Securities. “Gas prices have already jumped sharply, and diesel costs are also rising. That means higher costs for travel, groceries, shipping and basic household use.”
“If families have to spend more on filling the tank and buying food, they will spend less on restaurants, travel, clothing, household items and everything else,” he said.
Rising gas prices are one of the many effects that a war in Iran could have on Americans’ household budgets.
Consumers have been under growing financial pressure over the past several years from post-Covid inflation, tariffs, rising debt and a labor market that began to weaken last year.
“There are still bumps in the U.S. economy, and an increase in energy has the potential to raise inflation expectations,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co.
This, in turn, “could cause (interest) rates to rise to dampen inflation,” he said.
Already, the war and its economic consequences have driven up the price of home mortgages, whose rates are tied to US Treasuries. On Friday, the average 30-year fixed-rate mortgage interest rate was 6.41%, according to Mortgage News Daily — up from just 5.9% before the US attacked Iran.
This comes after February inflation data released this week showed it was steady from the previous month.
But now, with the war in Iran, all bets are off when it comes to inflation.
Any potential economic upside from higher tax refunds “is certainly being somewhat muted by what’s going on in the Middle East,” said Max Kahn, president of retail and technology research firm Coresight Research.
If not for the war, he said, taxpayers “might have used it for more discretionary items. But probably a larger portion than expected would have gone to gas.”
The good news, however, is that tax refunds “can mute the impact of higher gas prices,” Kahn said. They can effectively insulate consumers against “psychological worry”.
Still, “it’s not going to create the bump that was created otherwise,” he said.
The impact of soaring gas prices on individual households’ budgets is relative, however, placing the greatest burdens on those least able to absorb the shock.
“Gas prices generally affect lower incomes more than upper incomes because it’s a higher percentage of their discretionary spending or their overall spending abilities,” Kahn said.
When it comes to gas, consumers typically stretch their dollars less than they do with other types of goods. Household goods and groceries, for example, can be bought in bulk or from discount chains.
“When energy costs go up, consumers don’t stop spending,” Wedbush’s Dietrich said. “They stop spending on what they want and spend more on what they want to buy.”
For an economy that relies on consumer spending like America’s, these broader risks eventually reach income levels, he said.
“Low-income households get squeezed by energy costs, but higher-income households can also get hit if stock markets hit their property values and stock market gains,” Dietrich said.
“The Iran war will act like a tax increase on consumers, except no one voted for it,” he said.
