Adjust Your Withholding using Form W-4

If you're getting a large tax refund, consider adjusting your federal income tax withholding on your paycheck. You'll get more now, and a smaller refund on next year's tax return.

Getting your withholding just right can be tricky, as Ross in California wrote to tell me. "I am working full time and have claimed zero. They take out almost $600 out every paycheck. What is the best number to claim, that will let me keep most of the money that I have earned, and not owe anything at tax time?"

Here's two tools I use to calculate the right number of withholding allowances: I use the withholding calculator from the IRS and the paycheck calculator from PayCheckCity.com. The first calculator will help you calculate how many withholding allowances you should claim on a new Form W-4. The second calculator will help you figure out how much your take-home pay will be using the new withholding allowances.

"More exemptions claimed on the W-4 will lower the amount of tax withheld, and lower the refund. This will put more money in your pocket throughout the year," explains Cindy Hockenberry, an analyst with the National Association of Tax Professionals. The goal is to get your withholding "as close to what you owe as possible," advises Financial Planning Guide Deborah Fowles. She suggests tweaking your income tax withholding twice a year so you can stay on top of your tax obligations.

You can also use the withholding calculator inside your tax preparation software. In TaxACT, for example, this is found in the "Next Year" tab.