Q: I've just completed my tax return, and I'm getting a big refund. While I have to admit I kind of like this since it feels like I'm getting "free money," I've also read that it's probably not the smartest way to manage my money. Should I adjust my withholding?

A: A timely question! I agree with whatever you've been reading. Your goal with income tax withholding should be to have withheld approximately the amount that you expect to owe, maybe a little more to be on the safe side, NOT to get a big refund in April. Why?

Well, by paying in more than you owe, you’re essentially giving the government an interest-free loan until you get back the excess you paid the following April. Wouldn’t you rather use that money -- your money – for your personal financial goals during that time? On the other hand, you don’t want to end up writing a big check or, worse, paying penalties either.

So how do you strike the right balance? As you probably know, your employer provides each employee with a Form W-4, the mechanism by which you communicate how much should be withheld from your paycheck. You can use the Personal Allowance Worksheet on the W-4 to help you determine the appropriate number of “allowances” for your tax situation.

Unfortunately, this form doesn’t really do anything to help you understand the impact of the change you are making, or offer any reassurance that you’re picking the right number. So many employees shy away from making any changes and end up in the same cycle year after year.

To the rescue: the IRS Withholding Calculator, which does what the Personal Allowance Worksheet does, plus it takes into account what you have already paid in for a given year and several other critical details, resulting in a more precise answer. It also provides feedback that gives you some idea what to expect when you file your return. (Example: “Based on the information you entered,… your expected refund should be about $200.”)

Keep in mind that actual income tax results don’t always match projections. After all, this might be the year you have a baby, sell stock for a gain, qualify for fewer deductions,... All of these things, and many more, can affect your tax liability. So it’s not a bad idea to plan on paying the Withholding Calculator a visit a couple times a year with updated information and making any changes needed to ensure you remain on track.