Early readings for the 2026 filing season show the average tax refund is $3,742, up more than 10% from last year.
Changes in tax policy are a major factor.
“The main reason why refunds are higher this year is the One Big Beautiful Bill Act (OBBBA) combined with withholding tables that have not been updated for most of the year,” said Alyssa Whatley, founder and Senior Tax Advisor at EasAly AI, a tax assistance company, via email.
The tax provisions in the OBBBA include an increase in the standard deduction for filers and additional deductions for seniors and employees who receive overtime or qualified tips.
“The law was passed in the middle of the year, so employers continued to withhold tax according to the old tax laws,” said Whatley. “As a result, many taxpayers had more tax withheld from their paychecks than they ultimately owed, and when they filed their returns, the withholding was refunded.”
Read more: Are tips taxable? How the new “no tax on tips” deduction works.
While more money sounds good, it really shouldn’t be the goal of taxpayers. Here is the reason.
Simply put, a large tax refund is a loan to the government – and it pays no interest.
“While a refund sounds like a bonus, it’s really just a refund of your overpayment,” said David Perez, founder and CEO of Tax Maverick, via email. “This money was used every month to pay expenses or manage debts.”
Debt is one of the reasons why high tax returns are so worrisome. American household debt is expected to increase by about 4% by 2025, according to data from the Federal Reserve Bank of New York. And serious delinquencies, payments that are at least 90 days past due, also increased.
So it’s not just about interest-free government debt. Given the high rate of inflation, rising unemployment, and long-term fiscal goals, the money could be better spent throughout the year.
Whether the money is tight or you’re living comfortably, overpaying your taxes is a missed opportunity. Here are just a few ways your hard-earned money can do more for you throughout the year.
If you’re struggling to make ends meet, a small tax refund could mean more financial breathing room.
“Adjusting your tax deductions gives you more money in every paycheck,” says Perez. “This can provide quick cash to cover living expenses, speed up debt payments, or reduce reliance on high-interest credit cards.”
You can use the money to increase your savings, which can cover emergencies or large purchases, so you don’t have to pay off credit card debt again.
High-interest debt generally refers to debt with an annual percentage rate (APR) of 8% or more. However, credit card rates are often very high.
The average credit card APR was 22.30.% in the fourth quarter of 2025, according to the Federal Reserve. That means that while the money you overpay in taxes sits with the government, earning no interest, your credit card balance costs you more each month.
Instead, you can adjust your savings and use the money to pay off your debt balances and save on interest.
Read more: 4 ways to pay off debt fast
Invest and earn interest
Perhaps the highest cost of tax refunds is the interest your money could earn in the market.
The average long-term return on the stock market is 7% adjusted for inflation. Although it is not guaranteed, and any year you may experience a profit or a loss, investment returns offer a much higher potential than having your money sitting with the government.
“Use the increased monthly cash flow to invest systematically in retirement accounts, brokerages, or high-yield savings,” says Perez. “This strategy allows money to start working for you immediately, increasing potential growth over time.”
Read more: The 10 best savings accounts right now
Taxpayers can update their withholding at any time during the year by filing Form W-4. It uses your income, filing status, and adjustments to determine how much you should set aside for taxes each paycheck.
Review steps 2 or 3 on your W-4 for lifestyle changes, such as adding an employee or dependent.
Adjust your withholding based on the additional income or deductions in step 4.
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You can increase the amounts in steps 4(a) and (c) to get more withheld from each check, which will lower your maximum tax refund.
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You can reduce the deduction in step 4(b) to increase the withholding and reduce your refund. If left blank, it takes the standard deduction ($16,100 for single filers in 2026).
Just be careful not to over-correct.
“Reducing hard holdings can result in a larger tax bill and possible underpayment penalties at the time of filing,” Perez said. “The ideal goal at tax time is to be close to the break-even point — whether it’s a minimum balance due or a minimum refund — to ensure you’re maximizing your income throughout the year.”
To find the correct 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.
