The war in Iran threatens to wipe out the economic development of major tax returns

Americans are poised to get a bigger refund when they file their taxes this year than in 2025, thanks to changes to the tax code.

Already, US households have received an average federal tax refund of $3,742, according to IRS data from Feb. 27. That’s about 10.6% higher than the average return last year.

Here’s the big deal: For tens of millions of Americans, the day their tax refund arrives is the biggest single-day cash flow they see all year.

This large-scale influx of money has negative effects on the entire economy, as Americans spend money on things like paying bills, buying big-ticket items and adding to savings accounts.

But this year, experts say the economic impact of the US-Israeli war on Iran could dampen any economic boost that might come from consumers using their tax refunds.

Since the start of the Iran war, the cost of oil has risen, causing gas and diesel prices to jump. On Friday, the average cost of a gallon of unleaded gas in the US was $3.64, according to GasBuddy’s live tracker. That’s about $0.72 more than last month’s average.

“When the war goes up for oil, it’s not just about fuel,” said Paul Dietrich, chief investment strategist at Wedbush Securities. “The price of petrol has already gone up, and the cost of diesel is also going up. That means higher costs of travel, food, transport and living at home.”

“If families have to spend more money to fill the tank and buy food, they spend less money on restaurants, tourism, clothing, household goods and everything else,” she said.

Rising gas prices are one of the few impacts the Iran war could have on Americans’ household budgets.

Consumers have been under increasing economic pressure over the past few years from post-Covid inflation, inflation, rising debt and a labor market that began to weaken last year.

“There is still inflation in the US economy, and the increase in capacity has the potential to raise inflation expectations,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co.

This, too, “may cause [interest] prices must increase to reduce inflation,” he said.

Already, the war and its economic consequences have increased the cost of mortgages, the rates of which are tied to US Treasuries. On Friday, the average 30-year mortgage interest rate was 6.41%, according to Mortgage News Daily – up from 5.9% before the US attacked Iran.

This comes after February inflation data released this week showed that it was unchanged from last month.

But now, with the war on Iran, all bets are off when it comes to inflation.

Any potential economic boost from higher tax returns “is somewhat muted by what’s happening in the Middle East,” said Max Kahn, president of retail and technology research firm Coresight Research.

He said that if war doesn’t happen, taxpayers “may use it for unexpected things. But probably a bigger part than expected will have to go to electricity.”

The good news, however, is that the tax rollback would “mute the impact of rising gas prices,” Kahn said. They may also protect consumers from “psychological anxiety.”

Still, “it’s not going to create the bump that it might have otherwise,” he said.

The impact of fuel price increases on each family’s budget is related, however, to the very high burdens placed on those who cannot absorb the shock.

“Gas prices generally affect lower incomes more than high incomes, because it’s a higher percentage of their discretionary spending or their overall spending power,” Kahn said.

When it comes to gas, consumers also have fewer ways to stretch their dollars than with other types of goods. Household goods and groceries, for example, can be bought in bulk or through discount chains.

“When electricity costs go up, consumers stop spending money,” said Dietrich, from Wedbush. “They just stop spending what they want and spend more on what they have to buy.”

In an economy as reliant on consumer spending as America’s, these broader risks eventually trickle down to income levels, he said.

“Low-income families are pressured by the cost of fuel, while high-income families may be affected if the stock market reaches commodity prices and stock market gains,” said Dietrich.

“War on Iran is like a tax increase on the consumer, except nobody voted for it,” he said.