How to Fill out a W-4 Form

I remember when I got my first job and was handed a W-4. I had no idea what it was or how to go about filling it out. For starters, the whole "allowance" thing threw me off. As far as I was concerned, an allowance was something my parents gave me for doing chores when I was a kid.
Then there was the "exemption from withholding" language that made no sense to me. Was I, or was I not, exempt?
I'm sure plenty of high school and college graduates are asking the same questions now as they start their first jobs and fill out a W-4 form for the first time. So let's go over the basics:
Why do I need to fill out a W-4? The information you provide on the form helps your employer figure out how much federal income tax to take out -- or withhold -- from your paycheck.
What's an allowance? An allowance reduces your taxable income. The more allowances you claim, the less tax will be withheld.
So on the W-4 Personal Allowances Worksheet you can enter a "1" on line A for yourself if your parents aren't claiming you as a dependent on their W-4 forms (ask them). Then on line 5 on the actual W-4 form, you can enter a "1." However, you'll be given the option to claim more allowances. The question is whether you should.
I don't want to pay a lot of taxes, so shouldn't I claim as many allowances as possible? No. You can, for example, claim an additional allowance if you're single and have only one job and have less tax withheld. But if you don't pay Uncle Sam during the year, you'll owe at tax time in April. Recent grads who are single and have no dependents will probably get their tax withholding right by claiming "1" allowance.
If you claim "0" allowances, though, you'll probably have too much withheld and will get a fat refund next spring. It sounds tempting, but you'll have less money to spend during the year, and you'll be giving the government an interest-free loan by letting it withhold too much from each of your paychecks.