How much should I withhold?

For many, tax time can feel like an exciting opportunity to receive extra money. For others, it's a stressful event filled with fees and financial trouble. Much of the annual income tax rollercoaster ride is due to confusion about withholding. Here are three tips to get your withholding right, so you get the most out of your income.

A big refund isn't necessarily a good thing.

It's easy to assume that receiving a large refund check in the mail is a financial gain. But did you know that the check you receive is essentially a payment for borrowed money? In effect, every dollar that you withhold over the tax amount you owe is an interest-free loan to the government. That's money you could be saving or investing. When you withhold too much, you're losing out on the interest or potential growth your money could make all year long.

You're not winning by not withholding enough.

Some people feel they get ahead by not withholding enough and keeping their money until the last minute. First off, this practice is illegal. You must pay 90% of the taxes you owe by the end of that year or an amount equal to 100% of your tax liability for the previous year — whichever is smaller. If you don't withhold the correct amount, you'll be charged an underpayment penalty fee. Plus, you'll have to shell out a large payment due when tax day rolls around — risking the fact that you may no longer have the funds available.

Withholding doesn't have to be a mystery.

The key to getting your withholding right is taking your time on the Form W-4. Although the text-heavy document may seem complicated and overwhelming, this sheet of paper walks you step-by-step through the withholding process. If you closely follow the directions, you will be able to accurately calculate the amount you should withhold from each paycheck. The IRS also provides a Withholding Calculator to help you determine the correct information to include on the form.

One last thing.

If you are self-employed or expect to receive large profits from investments or property sales, you should pay estimated taxes. With estimated taxes, you pay a quarter of your expected tax responsibility. These payments are due four times a year (April 15, June 15, September 15, and January 15). If you are retired, you may need to submit estimated taxes if you haven't opted for voluntary withholding on your pension or IRA income.

This should not be considered tax advice. You should consult a tax professional to discuss your unique situation.