Tax Refunds Expected to Hit Record Highs in 2026

Ever wonder why your tax refund could be bigger than usual this year? Experts are projecting that the 2026 tax refund season may set records for both the number of refunds issued and the average amount returned. This surge is largely attributed to the One Big Beautiful Bill Act, which passed in the summer of 2025 and included several retroactive tax changes for the 2025 tax year.

Among the changes are a higher standard deduction, a higher cap on property-tax deductions, and an extra deduction for most taxpayers aged 65 and older. According to Erica York, vice president of the Tax Foundation, a nonpartisan research group, the IRS did not update its withholding tables for 2025. As a result, many taxpayers overpaid their taxes throughout the year. "When people file their taxes in 2026, that's when they'll receive the benefit of those tax cuts," she explains.

The Tax Foundation projects that the average refund for 2026 will be around $3,800, a notable increase from about $3,000 for the 2023 and 2024 tax years. Among taxpayers in the 60th to 80th income percentile, an impressive 98% are expected to owe $1,150 less in taxes for 2025 compared to 2024. This means more money in the pockets of middle- and upper-income taxpayers, who will reap the greatest benefits from these tax changes.

So, if you're anticipating a tidy sum from Uncle Sam this year, how can you maximize the impact of your tax refund? Financial experts suggest several strategies.

1. Reduce Your Financial Stress

One of the best uses for a portion of your refund is to replenish your emergency fund. After dipping into savings for unexpected expenses or holiday bills, your refund provides an opportunity to reset financially. "Everyone should have three to six months' worth of living expenses in a cash reserve," advises Gary Williams, a certified financial planner.

2. Budget for Upcoming Expenses

If you know you have a big bill coming up—like college tuition or major car repairs—your refund can serve as a buffer to protect your regular budget. Planning ahead can help you allocate funds more effectively.

3. Do Some Advance Planning

Research shows that people often view tax refunds as a bonus rather than a return of their own income. This mindset can lead to impulse spending. Michelle Wolff, a certified financial planner, suggests that preplanning how to use your refund can help combat this temptation. "When people commit to saving a specific percentage of their refund and identify a purpose for the money, they're more likely to follow through," she states.

4. Max Out Your HSA

If you have a high-deductible health insurance plan and contribute to a Health Savings Account (HSA), adding part of your refund to it can be a wise move. HSAs offer a triple tax advantage: contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2026, the contribution limits are $4,400 for individuals and $8,750 for families, with an additional $1,000 for those aged 55 and older.

5. Split Your Direct Deposit

If you haven't filed your taxes yet and plan to use your refund for multiple goals, the IRS allows you to split your refund among different accounts using Form 8888. This makes it easier to manage your finances without the hassle of transferring funds later.

6. Right-Size Your Withholding

This year's withholding tables have been updated to account for the 2025 changes in tax law. If you typically receive a refund, your refund for the 2026 tax year should return to a more typical level. Financial advisers recommend aligning your withholding with your actual tax liability to maximize immediate cash flow for savings or debt reduction. To update your withholding, you can use Form W-4 for employee wages or other relevant forms for Social Security benefits and pensions.

But there's a catch. Starting in 2026, income-tax refunds will no longer be sent as paper checks but instead will be deposited directly into bank accounts. Previously, these paper checks were considered "new money" by banks, allowing taxpayers to purchase promotional Certificates of Deposit (CDs) with those funds. Direct deposits, on the other hand, are typically not treated as "new money," making it harder to qualify for promotional CD rates.

For those who have been purchasing CDs with their tax refunds, this change raises questions. A reader recently inquired whether it’s still possible to benefit from promotional rates. The Moneyist responded that taxpayers could route their refunds to other financial institutions and then transfer the funds to their main bank, but banks often have lookback periods of 30 to 90 days to detect such maneuvers.

As for current promotional CD rates, they hover around 4% to 4.20%. In light of the new policies, some taxpayers are considering U.S. Treasurys as an alternative. Treasurys are regarded as safe investments, backed by the U.S. Department of the Treasury. They do not offer promotional deals like CDs, but they can provide higher yields, especially for those in lower tax brackets.

Investors can purchase short-term Treasury bills, medium-term notes, or long-term bonds through brokerage accounts or TreasuryDirect. A recommended strategy is to "ladder" Treasury bills—dividing your investment into portions with staggered maturities, which helps provide regular access to cash without early withdrawal penalties.

In the current economic climate, where the $30 trillion Treasury market is showing signs of strain, it’s important to stay informed about interest rates and market conditions. The Federal Open Market Committee recently held the federal funds target rate steady, indicating a balancing act as officials seek to manage inflation.

As you prepare for this year’s tax refund, keep in mind that large refunds mean the IRS has held your money interest-free. By planning wisely, you can turn that refund into a valuable asset for your financial future.