UPDATE- This post is continued here
Not too many and not too few! The worksheet that the IRS provide with the form is kind of helpful but might still leave you scratching your head.
The more allowances that you claim, the lower the taxes are that are subtracted from your gross pay.
Claim too many, and you may end up paying in to the IRS at the end of the year. To add insult to injury, you might have to pay a penalty too!
Claim too few, and you give the government a free loan for the year.
Many people use their W4 allowances kind of like a forced savings program. This is okay if it is absolutely the only way that you can save money, although you have many other options available to you.
Instead giving the government a free loan for $xxxx.xx, claim a fewer number of allowances to increase the amount of your take home pay. Take this increase and divert it to Sharebuilder or some other type of savings program. This is wiser than getting a big check back from the government. Why?
First, you won't have access to the cash. This is good if you don't need it for something else like paying off bills. This means that you won't spend it frivolously.
Second, you will be investing the money, not just saving it. The difference between savings and investing (in theory anyway) is that saving your money means you're merely holding onto it, not spending it. The cash is depreciating (unless you have it in a high yielding account, like ING Direct). Investing it means that your money is working for you, cloning itself, becoming worth even more over time.
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