Two key amounts are affected by your W-4: your paycheck and your tax refund. How you fill out your W-4 largely depends on what outcome you are trying to achieve.
Claiming more allowances will put more money in your paychecks, so you can spend or invest it as needed throughout the year. But it could also keep you from over-withholding, which means a smaller, or non-existent tax refund. You could even end up owing tax at the end of the year if you claim too many allowances on your W-4.
Claiming fewer allowances will increase your withholding – giving you smaller paychecks, but increasing the chance you’ll get a tax refund. Some people depend on this annual “windfall” as a way of saving money.
Other factors, such as your spouse’s income, can also affect your W-4. For example, when one spouse earns significantly more than the other, the spouse with the higher income will sometimes claim all the allowances on his or her W-4. Other couples will split the allowances between their two paychecks.
The key is to understand the rules, so you can get the outcome you’re looking for.