An early read on the 2026 filing season shows the average tax refund is $3,742, up more than 10% from last year.<\/p>\n
Changes to tax policy are the biggest culprit.<\/p>\n \u201cA major reason many refunds are higher this year is the One Big Beautiful Bill Act (OBBBA) combined with withholding tables that weren\u2019t updated during most of the year,\u201d said Alyssa Whatley, co-founder and Chief Tax Counsel at EasAly AI, a tax relief company, via email.<\/p>\n Tax provisions in the OBBBA include an increased standard deduction for filers and additional deductions for seniors and workers who receive overtime or qualified tips.<\/p>\n \u201cThe law was enacted mid-year, so employers continued withholding taxes based on the older tax rules,\u201d said Whatley. \u201cAs a result, many taxpayers had more tax withheld from their paychecks than they ultimately owed, and when they filed their returns, the excess withholding was refunded.\u201d<\/p>\n Read more: <\/em>Are tips taxable? How the new “no tax on tips” deduction works.<\/em><\/p>\n While more money sounds good, it actually shouldn\u2019t be the goal for taxpayers. Here\u2019s why.<\/p>\n Simply put, a large tax refund is a loan to the government \u2014 and it doesn\u2019t pay you interest.<\/p>\n \u201cWhile a refund feels like a bonus, it\u2019s merely the return of your own overpaid money,\u201d said David Perez, founder and CEO of Tax Maverick, via email. \u201cThis cash could have been used monthly to cover expenses or manage debt.\u201d<\/p>\n Debt is one reason why a higher tax refund is so concerning. U.S. household debt increased by about 4% in 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 rose.<\/p>\n So it\u2019s not just about an interest-free government loan. Given the elevated inflation rate, rising unemployment, and long-term financial goals, it\u2019s money that could\u2019ve been put to better use throughout the year.<\/p>\n Whether money is tight or you\u2019re 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.<\/p>\n If you\u2019re struggling to pay for day-to-day expenses, a smaller tax refund could mean more financial breathing room.<\/p>\n \u201cAdjusting your tax withholding gives you more money in each paycheck,\u201d said Perez. \u201cThis can provide immediate funds to cover living expenses, accelerate debt payoff, or reduce reliance on high-interest credit cards.\u201d<\/p>\n You can even use the money to beef up your savings, which can cover emergencies or large purchases, so you\u2019re not also racking up credit card debt.<\/p>\n High-interest debt usually refers to credit with an annual percentage rate (APR) of 8% or more. However, credit card rates tend to be much higher.<\/p>\n The average credit card APR was 22.30.% for the fourth quarter of 2025, according to the Federal Reserve. That means while the money you\u2019re overpaying in taxes sits with the government, earning no interest, your credit card balance costs you more each month.<\/p>\n Instead, you could adjust your withholdings and use the money to chip away at your debt balances and save on interest.<\/p>\n Learn more: <\/em>4 ways to pay off debt faster<\/em><\/p>\n Perhaps the highest opportunity cost of a large tax refund is the interest your money could have earned in the market.<\/p>\n The average long-term return on the stock market is 7% when accounting for inflation. While it\u2019s not guaranteed, and any given year you can experience a gain or a loss, investment returns present a much higher potential than having your money sit with the government.<\/p>\n \u201cUse the increased monthly cash flow to invest systematically into retirement accounts, brokerage accounts, or high-yield savings,\u201d said Perez. \u201cThis strategy allows the money to start working for you immediately, maximizing potential growth over time.\u201d<\/p>\n Read more: <\/em>10 best high-yield savings accounts right now<\/em><\/p>\n Taxpayers can update their withholding at any time during the year by filing out Form W-4. It uses your income, filing status, and adjustments to determine how much money to set aside for taxes each paycheck.<\/p>\n Update steps 2 or 3 on your W-4 for life changes, such as adding a job or a dependent.<\/p>\n Adjust your withholding based on additional income or deductions in step 4.<\/p>\n You can increase the amounts in steps 4(a) and (c) to have more withheld per paycheck, which will lower your large tax refund.<\/p>\n<\/li>\n You can decrease your deductions in step 4(b) to increase your withholdings and shrink your refund. If left blank, it assumes the standard deduction ($16,100 for single filers in 2026).<\/p>\n<\/li>\n<\/ul>\n Just be careful not to overcorrect.<\/p>\n \u201cReducing withholding too aggressively can result in a significant tax bill and potential underpayment penalties at filing time,\u201d said Perez. \u201cThe ideal goal at tax time is to be close to a break-even point \u2014 either a small balance due or a small refund \u2014 to ensure you maximize your cash flow throughout the year.\u201d<\/p>\n 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.<\/p>\n<\/p><\/div>\n<\/div>\n<\/div>\n<\/figure>\n
Invest and earn interest<\/h3>\n
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