I received my 2011 W-4 form at work today, which reminded me how confusing it was the first time I got one. The form lets your employer know how much to withhold from your earning for federal income tax. You may adjust the allowance on your W-4 whenever you choose to depending on any changes in your financial situation or tax rates. If your income and tax rate remain the same, and you are satisfied with the current amount of income withheld, there is no need to make changes.
Genreally, you want the amount withheld to be as close to what you need to pay in taxes that year as possible. This way, there are no surprises at the end of the year. You won't have to worry about paying a large sum of money to the government if you didn't have enough withheld. If you have too much withheld and are expecting a big tax return check in the mail, you're essentially loaning the governement money with no interest.
The form itself includes a worksheet that helps you calculate the number of allowances. However, you can find a more accurate calculator on the IRS website at http://www.irs.gov/individuals/article/0,,id=96196,00.html
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