A preliminary reading of the 2026 tax filing season shows the average tax refund is $3,742, more than 10% higher than last year.
Changes in tax policy are the biggest culprit.
“One of the main reasons many refunds are larger this year is the One Big Beautiful Bill Act (OBBBA) combined with withholding tables that have not been updated for most of the year,” Alyssa Whatley, co-founder and senior tax advisor at EasAly AI, a tax relief company, said via email.
The OBBBA tax provisions include an increased standard deduction for taxpayers and additional deductions for seniors and workers who receive qualified overtime or tips.
“The law was enacted in the middle of the year, so employers continued to withhold taxes based on the older tax rules,” Whatley said. “As a result, many taxpayers had more taxes withheld from their paychecks than they ultimately owed, and when they filed their returns, they were refunded the excess withholding.”
Read more: Are tips taxable? How the new “no tip tax” deduction works.
While more money sounds good, it really shouldn’t be the goal of taxpayers. Here’s why.
Simply put, a large tax refund is a loan to the government and pays you no interest.
“While a refund feels like a bonus, it is simply the return of your own overpaid money,” David Perez, founder and CEO of Tax Maverick, said via email. “This cash could have been used monthly to cover expenses or manage debt.”
Debt is one of the reasons why higher tax refunds are so concerning. US household debt rose about 4% in 2025, according to data from the Federal Reserve Bank of New York. And serious delinquencies also increased, payments that are at least 90 days late.
Therefore, it is not just an interest-free government loan. Given the high inflation rate, rising unemployment, and long-term financial goals, this is money that could have been better used throughout the year.
Whether you have little money or live comfortably, overpaying taxes is a missed opportunity. These are just a few ways your hard-earned money can do more for you all year long.
If you’re struggling to pay for everyday expenses, a smaller tax refund could mean more financial breathing room.
“Adjusting your tax withholding gives you more money in each paycheck,” Perez said. “This can provide immediate funds to cover living expenses, speed up debt repayment, or reduce reliance on high-interest credit cards.”
You can even use the money to build up your savings, which can cover emergencies or large purchases, so you’re not racking up credit card debt.
High-interest debt generally refers to credit with an annual percentage rate (APR) of 8% or more. However, credit card rates tend to be much higher.
The average APR for credit cards was 22.30% for the fourth quarter of 2025, according to the Federal Reserve. That means that while the money you overpay in taxes stays in the government’s hands and doesn’t earn interest, your credit card balance costs you more each month.
Instead, you could adjust your withholdings and use the money to reduce your debt balances and save on interest.
More information: 4 ways to pay your debts faster
Invest and earn interest
Perhaps the biggest opportunity cost of a big tax refund is the interest your money could have earned in the market.
The long-term average return of the stock market is 7% when inflation is taken into account. While it is not guaranteed, and in any given year you may experience a profit or a loss, investment returns present much greater potential than leaving your money in the hands of the government.
“Use the increased monthly cash flow to systematically invest in retirement accounts, brokerage accounts or high-yield savings,” Perez said. “This strategy allows money to start working for you immediately, maximizing potential growth over time.”
Read more: The 10 Best High-Yield Savings Accounts Right Now
Taxpayers can update their withholding at any time during the year by completing Form W-4. It uses your income, filing status, and adjustments to determine how much money to set aside for taxes each paycheck.
Update steps 2 or 3 of your W-4 for life changes, such as adding a job or a dependent.
Adjust your withholding based on additional income or deductions in step 4.
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You can increase the amounts in steps 4(a) and (c) so that more is withheld per paycheck, which will reduce your large tax refund.
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You can decrease your deductions in step 4(b) to increase your withholding and reduce your refund. If left blank, the standard deduction ($16,100 for single filers in 2026) is assumed.
Just be careful not to overcorrect.
“Reducing withholding too aggressively can result in a significant tax bill and potential underpayment penalties upon filing,” Perez said. “The ideal goal when filing taxes is to be close to a break-even point (either a small balance due or a small refund) to ensure cash flow is maximized throughout the year.”
To find the right balance, use the IRS Withholding Estimator or work with a certified tax professional. And be sure to update your W-4 after major life events, such as getting married or divorced, buying a home, having a child, or starting a business.