The Average Tax Refund Is Up 10.6%. Here's Why That's Bad News.

Key Points
Tax law changes have resulted in many Americans getting a larger refund.
A refund can feel like a windfall, but it's actually a return of your own funds.
Changing your withholding to keep more of your money during the year can provide you with more flexibility.
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It's tax season, and many Americans are in for a surprise this year. The average tax refund is up 10.6%, according to early filing data, so most people will be getting more money back when they file their 2025 taxes than they have in the past.
In fact, as of the end of February, the average refund among individual tax filers hit $3,742, up $360 compared with the average refund during the 2024 filing year. And that's just the average. Some people who qualified for big tax breaks under the One Big Beautiful Bill Act, like seniors who qualified for a new $6,000 deduction, will get even larger refunds.
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But while getting a big tax refund can feel like a financial windfall, the reality is that this isn't actually a great thing for most people. Here's why.
A big tax refund isn't all it's cracked up to be
The main reason a big refund isn't actually a great thing is that the refund is just a return of your own money that the IRS got to keep all year long.
You don't get interest from the IRS for tax overpayments made early in the year, even though all that money isn't returned to you until the following April. So, the IRS got to keep your money for a long time without any benefit to you. Not only that, but the money was completely trapped with the IRS until tax season rolled around.
If you overpaid your taxes by a significant amount -- say, a couple thousand dollars -- and then you had an unexpected expense you weren't ready for, you could potentially be forced into debt instead of just using your own money that the IRS is holding.
Giving up the freedom to use your money the way you want, and giving up the chance to invest the money or earn interest in your savings account, isn't a good thing, even if it feels nice to get a big refund on tax day.
Should you adjust your withholding?
The tax refunds are especially large this year because the One Big Beautiful Bill Act changed the tax rules to provide more tax breaks -- and it did so mid-year. However, most people didn't adjust the amount they were having taken out of their checks to pay taxes, and the IRS also didn't update withholding tables right away.
The result is a big overpayment by many taxpayers. And since many of the key tax changes in the One Big Beautiful Bill will last at least until 2028, many people could end up overpaying next year as well. This can be avoided by adjusting the amount you have withheld from your paychecks so you pay less tax during the year.
You do need to make sure you pay enough that you aren't hit with penalties for making late tax payments. You also should be aware that some of the key tax code changes -- like an extra $6,000 deduction that reduces the taxable income of eligible seniors -- will be going away in a few years unless lawmakers extend them. So if you adjust your withholding and your tax breaks go away, you'll need to change things back when the rules change in the future.
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