With the economic recovery on a steady path, many taxpayers are looking back at the Great Recession and its impact on incomes, housing and retirement plans and wondering exactly how best to complete Form W4 – Employee’s Withholding Allowance Certificate.

Form W4 is a good tax planning tool. By dictating how many exemptions to claim, you control the size of your paycheck and the amount of money from each check that will be paid to the IRS and to your state’s taxing agency, if you live in a state that levies income tax.

 If you claim too many exemptions, your check will be higher but you may find yourself owing a large tax liability at year end. Over the years I’ve had the misfortune of helping folks who didn’t claim properly and found themselves in trouble. It can be devastating, credit-ruining, and very expensive to crawl out from under.

On the other hand, if you claim too few exemptions, your check will be smaller and you may receive a substantial refund from the IRS. But here’s the thing with those large refunds: conventional wisdom states that you are giving an interest-free loan to the government for the year. Some folks don’t really care about that and consider it forced savings account that can be used to purchase a new gadget or take a vacation when the refund check arrives. Besides, it’s not like the banks are paying competitive rates on savings these days.

There is also the possibility of claiming “exempt” on line 7 of the form, which works if you will have no filing requirement. This applies to students, part timers making very small incomes, some retired individuals making very little money and with no other sources of income. But naturally, it’s complicated. So check the IRS Filing Requirements to find out where you stand.

Otherwise, to determine how many exemptions you should take, complete the worksheet on page 1 of Form W4. Claiming exemptions for filing status of Head of Household and for number of dependents is a great start to deciding how many exemptions will work for you.

However, there are other factors to consider. Let’s say you are single with three children and can claim the Head of Household status. According to the worksheet, you will be able to claim five exemptions. This may work out as a break even for you next April 15. However, there may be other factors to consider. Perhaps you are also running an online business on the side making a few grand extra every month. That money will be taxable and if you are not making estimated tax payments to cover these extra taxes then you should adjust your withholdings from five perhaps down to zero. Then again, what if you are using the extra monies from your self-employment to pay for your health insurance or fund your IRA account? If so, those are deductions that will substantially reduce your tax liability. My best advice is that if you are also self-employed speak with a tax professional to help you determine the correct number of exemptions to claim.

Page 2 of Form W4 takes into consideration the lowering of your tax bill via your ability to claim itemized deductions and other adjustments to income. It also includes a worksheet for families that have two earners or if you have more than one job.

You might want to pull out a copy of your prior year tax return in order to complete these sections.

Tax law is a very complex subject and can be tricky for even a professional tax person much less the average taxpayer. If you get confused with all the worksheets and caveats and exceptions and rulings, then I suggest you ask a tax professional to help you complete the worksheet and determine the safest approach to withholding for you.

Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.