Some people like getting a refund, but unless it's the only way you can save, it's a bad idea because you are making an interest free loan to Uncle Sam.
Paying too little is a bigger problem. The Internal Revenue Service expects you to pay taxes throughout the year by having them withheld from your pay or pension checks, or by making quarterly estimated tax payments.
If you don't pay enough through these methods, when you file your return you could face an underpayment penalty and a tax bill you can't easily pay.
The reasons people end up with a refund or tax bill include:
Making errors on their W-4 payroll withholding form, such as choosing the wrong filing status or number of allowances.
Not changing their withholding as a result of life changes such as marriage, divorce, death of a spouse, getting a second job, having a baby or having a child no longer qualify as a dependent.
Not making estimated tax payments, or enough payments, on income from a business.
Finding out their employer was treating them as an independent contractor (rather than employee).
Not having enough taxes withheld or paid on other nonwage income, including capital gains, dividends and interest; unemployment benefits, Social Security or pensions.
There are several ways to correct or prevent these problems.
W-4 adjustments
If you are an employee, you can increase or reduce your federal tax withholding by submitting a new W-4 form to your employer. This form tells your employer how much to withhold from your paycheck based on your individual circumstances. To get an accurate estimate, use the instructions that come with the form or an online payroll withholding calculator.
A single person with no dependents, one job and no mortgage generally would check the single box on line 3 and enter two allowances on line 5. The more allowances you claim, the less tax will be withheld.
If your refund or taxes due for 2012 was less than $1,000, you probably don't need to make any adjustment for 2013 unless your circumstances have changed, says Tom Reahard, chief executive of Symmetry Software, which runs Paycheckcity.com.
If your margin of error was $1,000 to $2,500, consider adding or subtracting one allowance. If you were off by $2,500 to $5,000, consider changing your allowances by two. This rule of thumb works for most people, not just singles, he says.
If you adjust your withholding in May, it will only be in effect for two-thirds of the year. If you are making more than about $75,000, you might need to over-correct your withholding to make up for the missing months and revise it again at the beginning of next year, Reahard says.
You can increase payroll withholding to cover the tax due on other sources of income - such as investments, a sideline business or unemployment benefits. Show the additional amount you want withheld on Line 6 of Form W-4.
Estimated tax
If are not an employee or have substantial other income or a full-time business, you generally must make estimated tax payments each quarter. The due dates for 2013 are April 15, June 17, Sept. 16 and Jan. 15, 2014.
You are expected to make four equal payments but if your income is uneven or you get a year-end bonus, you might be able to vary or skip certain payments using the IRS annualization method.
If you have a business, you will need to include self-employment tax in your estimated payments. This covers both the employer's and employee's share of Social Security and Medicare taxes. For 2013, the self-employment tax rate is 15.3 percent on the first $113,700 of net income and 2.9 percent on the amount over that.
You can ask to have federal taxes withheld from your Social Security or unemployment benefits, or to change your original withholding request, by submitting IRS Form W-4V to the payer. To change the amount withheld from pension and annuity payments, submit IRS form W-4P to the payer.
Safe harbors
If you are not sure how much your income will be this year, you can avoid an underpayment penalty for 2013 by paying at least 100 percent of your 2012 tax liability through withholding and/or estimated taxes. (This is 100 percent of what you owed for the whole year, not what you paid with your tax return). If your adjusted gross income is more than $150,000 ($75,000 if married filing separately), you must pay at least 110 percent of last year's tax liability to qualify this so-called safe harbor penalty waiver.
Johnny Yee, a coach/trainer with the IRS Volunteer Income Tax Assistance program, says one of the biggest shocks low- and moderate-income taxpayers get is receiving a 1099-MISC for non-employee compensation. "These taxpayers are considered independent contractors or self-employed. In addition to the income taxes on their earnings, they have to pay (self-employment) taxes, which could result in a very large tax liability if they did not make estimated tax payments. Many thought they were employees until their tax return is done, then the bad news."
That's why it's important for all workers to know at the beginning of the year if they are employees or independent contractors.
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