If the IRS usually owes you a substantial amount when you file your income tax return, or you typically owe the IRS a substantial amount at that time, you should consider adjusting your withholding arrangement with your employer. Your employer withholds income tax from your paycheck based on the number of exemptions and allowances you claim on Form W-4. You are asked to give the employer this form when you are first hired. Problems arise, however, because it's up to you to give the employer new W-4s as your tax circumstances change over the years and many employees don't take this step. For example, if you have children or take out a mortgage but fail to adjust your withholding downward to reflect the tax benefits these events generate, you may be overpaying your tax during the year.

If you have too much withheld during the year, of course, you will receive a refund after filing your return. While everyone enjoys getting a refund, in fact, it means you have made an interest-free loan to the government. You could have used the money during the year to generate income or for personal purposes. You should adjust your employer's withholding downwards to increase your regular take home pay.

At the other extreme are taxpayers who have too little withheld and who owe substantial amounts come April 15th. While they enjoy the "extra" amounts received in each paycheck, the costs incurred for this enjoyment can far outweigh its benefits. Not only will you be paying back the amounts owed in taxes in April, but you will likely be tacking on extra in the form of penalties. If this describes your situation, you should adjust your employer's withholding upwards. (As a rough guideline, you should be owing less than 10% of your tax bill come April.)

Unfortunately, the procedures for arriving at the proper withholding amounts are among the more complex ones taxpayers confront. A wide array of factors play a role: exemptions, deductions, marital status, your spouse's income, and others.