Is it smarter to aim for a small refund or to owe a little at tax time?

The ideal target is breaking even, or owing a small amount just under the IRS safe-harbor threshold that triggers an underpayment penalty. A large refund means you gave the government an interest-free loan all year; that money could have been earning interest in a high-yield savings account or reducing debt. Owing a small amount means you kept your cash working for you and simply settle up in April. The risk with owing is crossing the penalty line, so aim to stay within the safe harbor: generally you avoid a penalty if you pay at least 90% of this year's tax or 100% of last year's (110% for higher earners), per IRS rules. Fine-tune with the IRS Tax Withholding Estimator.