Use the W-4 to your Advantage

It's fairly safe to say that, for most people, filling out tax forms is about as much fun as going to the dentist for an impacted wisdom tooth. They fill them out (or have then done so) to the best of their abilities, but they actually understand very little of what it all means at tax filing time. Some people seem to always pay even though they've done all the right things. If you feel like this is you, then take heart; there's always something else that you can do.

Consider, for instance, your W-4 form. That's the form your employer asks you to complete (along with a stack of others) when you begin a new job. This form determines how much your tax withholding will be; in other words, the amount of money that's deducted from your paycheck in the form of Medicare-, Social Security-, federal- and state taxes. You see, everyone wants their piece of your pie.

However, there is a fine line between too much and too little being withheld. If you have too little money withheld, the government will come down hard on you and ask for all of that money back come April 15th. Conversely, if you withhold too much, you could put yourself in the position of living hand-to-mouth throughout the year just to get a sizeable tax refund. Both ways have a downside. But, W-4 forms do have the advantage of being changeable; you can increase or decrease your withholding as you see fit during the year. And it's not a one-time deal. By simply filling out another W-4, you can make changes whenever you wish.

On the W-4 form, it asks for your withholding allowances. These allowances are for your exemptions, which include your dependents and certain special conditions. You can claim an allowance for yourself, your spouse and your dependents – as long as no one else is claiming them as an exemption. However, just because you have the right to take other allowances, doesn't mean that you necessarily have to. For example, by claiming an allowance for only yourself and on one else (assuming you have other dependents), you'll have more money withheld from your paycheck and (presumably) receive a bigger refund when you file. But then again, why should you allow the IRS to hold onto your hard-earned cash and gain interest on it during the year? You could claim the allowances you're entitled to, keep the money in your paycheck and put those extra dollars into an IRA or other investment vehicle where you'll reap the interest yourself.

If you're good at figuring taxes, you might try this handy tip: claim all of the exemptions that you are entitled to. Then, with perhaps two or three months left until end of the year, if you find that you haven't paid quite enough to keep the IRS out of your pocket, change your W-4 form to reflect single-rate withholding (if you're married) or have extra money taken out of your paycheck to cover it. If you calculate it correctly, you'll break even (or nearly so) at tax time and owe the government nothing.