Initial figures for the 2026 tax filing season reveal that the average refund is around $3,742, marking an increase of over 10% compared to last year.
This increase is primarily attributed to changes in the tax system.
“The main reason so many refunds are higher this year is the One Big Beautiful Bill Act (OBBBA) in conjunction with outdated withholding schedules,” noted Alyssa Whatley, co-founder and principal tax advisor at EasAly AI, in an email.
The tax provisions in OBBBA include higher standard deductions and additional allowances for seniors and those earning overtime or qualified tips.
“Since the law was passed in the middle of the year, employers kept withholding taxes under the previous regulations,” Whatley explained. “Consequently, many taxpayers ended up with more withheld than they owed, leading to refunds when returns were filed.”
While receiving more money may sound appealing, it really shouldn’t be the ultimate goal for taxpayers. Here’s why:
A significant tax refund essentially represents an interest-free loan to the government.
“Though a refund might feel like a nice surprise, it’s just the money you overpaid,” David Perez, founder and CEO of Tax Maverick, shared in an email. “This cash could have been better utilized for managing monthly expenses or repaying debts.”
The concern over large refunds also ties back to debt. In 2025, U.S. household debt increased by about 4%, according to data from the New York Fed. There was also a rise in serious delinquencies, with many households at least 90 days overdue.
In essence, these refunds aren’t just interest-free loans. That money could have been more effectively used throughout the year, especially given rising inflation and unemployment, along with other long-term financial goals.
Even if your financial situation is stable, overpaying on taxes results in missed opportunities. Here are a few ways your earnings could extend beyond tax season:
If you are finding it hard to manage daily expenses, a smaller tax refund could actually provide some financial relief.
“When adjusting your tax withholding, you gain more money in each paycheck,” Pérez notes. “This creates immediate funds to help cover living costs, speed up debt repayments, and reduce dependence on high-interest credit cards.”
A portion of that extra cash could also help bolster savings for emergencies or significant purchases without incurring credit card debt.
High-interest debt is generally defined as any credit with an annual percentage rate (APR) of 8% or above. Still, credit card interest rates often soar well above this threshold.
The Federal Reserve indicated that the average APR for credit cards reached 22.30% in the fourth quarter of 2025. This means any taxes overpaid remain with the government without incurring interest, while outstanding credit card balances add to your monthly financial obligations.
Instead, by modifying your tax withholding, you can proactively reduce your debt and save on interest costs.
Invest and Earn Interest
One of the most significant opportunity costs tied to receiving large tax refunds is the potential interest your money could earn in the market.
Considering inflation, the average long-term stock market return is around 7%. While there’s no guarantee of consistent profits year over year, the odds of gaining returns in investments far surpass the likelihood of the government offering profitable terms.
“Utilize your increased monthly cash flow to invest strategically in retirement accounts, brokerage accounts, or high-yield savings,” Perez adds. “This way, your money can begin working for you and maximally increasing its growth potential over time.”
Taxpayers have the flexibility to update their withholdings at any point during the year by filing Form W-4. This form takes into account your income, filing status, and any relevant adjustments to determine the appropriate amount to withhold for taxes on each paycheck.
Adjust Steps 2 or 3 of your W-4 whenever you experience changes in your situation, such as gaining employment or having dependents.
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You might consider increasing the amounts in steps 4(a) and (c) to augment withholdings from each paycheck, ultimately minimizing the size of your tax refund.
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Step 4(b) allows you to decrease your deduction to enhance your withholding, therefore reducing your refund. If left blank, the standard deduction would be applied ($16,100 for single filers in 2026).
However, it’s crucial to avoid overcorrecting.
“If you reduce your withholdings too drastically, you might risk facing substantial tax payments along with underpayment penalties,” Pérez warns. “The best practice at tax time is to aim for a balance, either owing a small amount or receiving a minor refund to keep cash flow optimized throughout the year.”
To discover the right balance, consider using the IRS Withholding Estimator or consult with a tax professional. Additionally, be sure to revisit your W-4 following any major life changes, like marriage, divorce, buying a property, welcoming a child, or starting a business.
