Explained: W-4 Tax Form for Income Withholding

At about this time each year Americans get bombarded with advertising for tax services and get their W2's sent to them in the mail. They daydream about getting a big tax return and what they’ll use it for.

Thoughts of big screen TV’s, vacations and down payments on cars flow through their head. What most people don’t realize is that having a big tax return is not automatically a good thing.

When you end up with a high tax return you are essentially giving the U.S. government an interest free loan on money that you earned. If you would have had the proper allowances set up you would have been able to invest that money, use it to pay off debt or avoid interest on credit cards. Ideally you want your tax return to be zero.

One of the big influences for how much you will receive in a return or owe to the IRS on your taxes each year is how you fill out the W-4 income tax withholding form. If you don’t fill out the W-4 as accurately as you can you will end up with a big tax return or owe the IRS a lot of money. If either of these situations describes you, look to change your W-4 allowance certificate that you file through your employer.

A good step by step process for how to correctly fill out a W-4 can be found at about.com. The IRS withholding calculator can be found here.

Just remember, the higher the number you have on your W-4 the more the government will withhold from your paycheck. Look to update this number each year that your financial situation changes.