Why bigger isn’t better with a tax refund
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 merely the return of your own overpaid money,” said David Perez, founder and CEO of Tax Maverick, via email. “This cash could have been used monthly to cover expenses or manage debt.”
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.
So it’s not just about an interest-free government loan. Given the elevated inflation rate, rising unemployment, and long-term financial goals, it’s money that could’ve been put to better use throughout the year.
Whether 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 pay for day-to-day expenses, a smaller tax refund could mean more financial breathing room.
“Adjusting your tax withholding gives you more money in each paycheck,” said Perez. “This can provide immediate funds to cover living expenses, accelerate debt payoff, or reduce reliance on high-interest credit cards.”
You can even use the money to beef up your savings, which can cover emergencies or large purchases, so you’re not also racking up credit card debt.
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.
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’re overpaying in taxes sits with the government, earning no interest, your credit card balance costs you more each month.
Instead, you could adjust your withholdings and use the money to chip away at your debt balances and save on interest.
Learn more: 4 ways to pay off debt faster
Invest and earn interest
Perhaps the highest opportunity cost of a large tax refund is the interest your money could have earned in the market.
The average long-term return on the stock market is 7% when accounting for inflation. While it’s 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.
“Use the increased monthly cash flow to invest systematically into retirement accounts, brokerage accounts, or high-yield savings,” said Perez. “This strategy allows the 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 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.
Update steps 2 or 3 on 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.
-
You can increase the amounts in steps 4(a) and (c) to have more withheld per paycheck, which will lower your large tax refund.
-
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).
Just be careful not to overcorrect.
“Reducing withholding too aggressively can result in a significant tax bill and potential underpayment penalties at filing time,” said Perez. “The ideal goal at tax time is to be close to a break-even point — either a small balance due or a small refund — 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 getting married or divorced, buying a home, having a child, or starting a business.