64% of Americans can't define this key tax term

Maris H | Twenty20

If you haven't reviewed your Form W-4, or aren't familiar with the form at all, you're not alone: More than half of Americans, 64%, cannot accurately define it, according to a new tax study from NerdWallet.

It's an important term to understand, as it affects how much money you'll owe, or get back, when you're filing your taxes.

Here's everything you need to know.

What is a W-4?

A W-4 is a form that tells your employer how much to withhold from your paycheck for taxes. You fill it out when you start a new job and can change it as necessary.

The form asks for the number of allowances you want to claim. You get an allowance for having a spouse or kids, among other things. Those allowances affect how much of your paycheck will be set aside for taxes. The more allowances you have, the less tax will be withheld.

If you withhold too little, you may owe the IRS come tax time. However, if you withhold too much, you could end up with a large refund, which means you've essentially given an interest-free loan to the government.

If you withhold too little, you may owe the IRS come tax time. If you withhold too much, you could end up with a large refund.

"Tax refunds aren't always wonderful," says Nerdwallet's report. Say you withhold too much over the course of the year and get $2,899 back, the average tax refund issued last year. That's about $240 a month that "you could've had to buy groceries, keep up with your bills, get the car fixed, pay down a loan or credit card balance faster or invest for the future," NerdWallet points out.

How often should you review your W-4?

"All taxpayers should review their W-4 election on at least an annual basis," Eric Bronnenkant, head of tax at Betterment, tells CNBC Make It. Plus, it's a good idea to revisit it after any major life change, he says, such as having a child, getting married or divorced, or if your spouse dies at any time during the year.

But according to the NerdWallet study, many Americans don't review and adjust their W-4: "More than a quarter of employed Americans (28%) have never adjusted their tax withholding, and about two-thirds of Americans who have ever filed a W-4 (65%) say they generally review their tax withholding only when starting a new job."

How do you know if you should adjust your W-4?

Start by using the IRS withholding calculator to determine the right amount for you to withhold. If your situation is complicated, or if you're confused, you may also want to consult with an accountant.

Next, review what your current withholding is. If the numbers don't match up — if you're over- or under-withholding — you can request a W-4 from HR and change your withholding at any time during the year.

Don't miss: Here's how much more money you'd have if you delayed retirement until 70, according to Stanford researchers

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Most Americans can't answer these basic money questions
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