I guess a fair number of people understand that if you are blessed by a big tax refund check every year, it is actually not a good thing from a personal finance angle. Why? Because it means you voluntarily extended an interest-free loan to the government. The money is not a gift from the government; it is yours by tax law in the first place. By changing your W-4 form (usually managed by HR department), you can improve your cash flow by only withholding your fair share of tax.

(To some extent, I am successful on that by having to pay $1,269 in April for tax year 2003 -- no penalties because it conforms with the law and it is good because its an interest-free loan FROM the Big Brother.)

To adjust your withholding, you need some familarity with the W-4 form. W-4 form ask for your name, address, social security number and marriage status, all of which you can do nothing about. The most important number W-4 asks for is the number of allowance you are claiming. The question will then be: how many allowance should you claim?

Usually HR people will point you to the W-4 Deductions and Adjustment Worksheet, in which you can make certain additions and substractions to get the number of allowance you should claim. However, there is a built-in bias in the worksheet, so most of the time, government will owe you money by the end of the year instead of vice versa. It is no coincidence that the average tax return check is in excess of $2,000.

If you expect your income, deduction and exemption status are stable from last year, and you received a large tax return from the recent tax filing, you should consult IRS publication 15, Employer's Tax Guide. In short, Pub 15 tells you how much each additional W-4 allowance is worth in tax withholding game. You don't need to read through the entire 68 pages of Pub 15; just go to page 35-36 for the formula, or search from page 37 for your applicable numbers. Note you will need your marital status (single or married) and your payroll frequency to get the right numbers.

For example, if you are married and are paid monthly, and your monthly taxable salary is $5,000, turn to page 52 and you can see by claiming zero allowance, $593 will be withheld. For one allowance, the withheld amount will be $555.

If, in addition, last year you declared 2 allowances, and you ended up with a fat tax return check of $3,000. Everything being equal, this year you should adjust the W-4 form so as to make sure your HR people will withhold $3,000 / 12 = $250 less every month this year. Because from page 52, the withholding amount for 2 allowance is $516, and you need to change it to $516 - $250 = $266, search $266 in the same row and you can see the right allowances number is 8 or 9. You then should declare the right number of allowances to avoid another interest-free loan to the government.