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The W-4 asks you to enter the number of allowances you want to claim. This number is what your employer uses to calculate the amount of income tax to withhold. Allowances represent, in large part, how many people depend on your income. Usually, you claim one allowance each for yourself, your spouse and each of your dependents.
However, you can adjust the number of allowances for your situation to avoid having too much or not enough tax withheld. For example, if you have a lot of deductions — several kids and a big mortgage interest payment each month — these factors will reduce your final tax bill, so you may want to claim more allowances on your W-4 to cut the withholding taken from your pay and hang on to more of your money now.
W-4 and your tax return
If you figure your allowances correctly, when you file your return in April you should neither owe a great deal in taxes nor get back a lot through a refund. While some folks like getting a big refund, that strategy is not necessarily to your advantage. That extra money you send to the government is, in essence, an interest-free loan from you to Uncle Sam. You might want to consider taking that extra cash from reduced withholding and putting it into a savings account where it can earn more money for you. Of course, that creates a different tax consideration, but that’s another story.