Early readings for the 2026 filing season show the average tax return is $3,742, up 10% from last year.
A change in tax policy is the biggest culprit.
“A big reason many returns are higher this year is the Big Beautiful Bill Act (OBBBA) combined with withholding tables that haven’t been updated for most of the year,” said Alyssa Whatley, co-founder and director of tax at EasAly AI, a tax exemption company by 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 instruction.
“The law went into effect in the middle of the year, so employers continued to pay taxes based on the old tax rules,” Whatley said. “As a result, many taxpayers ended up withholding more tax than they owed, and when they filed their returns, the excess tax was returned.”
Read more: Are tips taxable? How the new “no tax on tips” deduction works.
While more money sounds good, it shouldn’t really be the goal for taxpayers. Here’s why.
Simply put, a large tax refund is a loan to the government — and it doesn’t pay you interest.
“While a refund feels like a bonus, it’s really just getting more of your money back,” David Perez, founder and CEO of Finance Maverick, said via email. “This cash can be used each month to cover expenses or manage debt.”
Debt is one reason why a higher tax return is so concerning. According to data from the Federal Reserve Bank of New York, US household debt will increase by about 4% in 2025. 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 rise in inflation, rising unemployment, and long-term financial goals, this is money that could be better used throughout the year.
If money is tight or you live 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 pay everyday expenses, a small tax refund can mean financial breathing room.
“Fixing your taxes gives you more money per paycheck,” Perez said. “It 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 boost your savings, which can cover emergencies or big purchases, so you don’t end up with credit card debt.
A high-interest loan usually refers to credit with an annual percentage rate (APR) of 8% or more. However, credit card rates are very high.
The average credit card APR for the fourth quarter of 2025 was 22.30%, according to the Federal Reserve. This means that while the money you overpay in taxes is sitting with the government, with no interest, your credit card balance is costing you more each month.
Instead, you can adjust your finances and use the money to chip away at your loan balance and save on interest.
learn more: 4 ways to pay off debt fast
Invest and earn interest
Perhaps the highest opportunity cost of a large tax refund is the interest your money has earned in the market.
The average long-term return on the stock market is 7% when adjusted for inflation. While it is not guaranteed, and any year you may experience a profit or loss, the return on investment offers a much higher potential than sitting your money with 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: 10 Best High Yield Savings Accounts Right Now
Taxpayers can update their taxes at any time during the year by filing a W-4 form. It uses your income, filing status, and adjustments to determine how much money to set aside for each paycheck.
Update steps 2 or 3 on your W-4 for life changes, such as adding a job or becoming dependent.
Adjust your taxes based on additional income or deductions in Step 4.
-
You can increase the amounts in steps 4(a) and (c) so that more money is withheld per paycheck, which results in a larger tax return.
-
You can reduce your deductions in step 4(b) to increase your taxes and reduce your return. If left blank, it assumes the standard deduction ($16,100 for a single filer in 2026).
Just be careful not to overdo it.
“Tax reduction too aggressively can result in a significant tax bill and potential underpayment penalties at the time of filing,” Perez said. “The ideal goal at tax time is to be close to the break-even point — either a small balance or a small repayment — to ensure you maximize your cash flow 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 marriage or divorce, buying a home, having a child, or starting a business.
(Translating Tags) David Perez
