You Could Still Lower Your 2016 Taxes -- Here's How

Unfortunately, most of the tax breaks that could save you money on the 2016 tax return that you'll file in the next few months expired with 2016. However, there is one big tax break that you can still take advantage of for the first few months of 2017: the deduction for contributions to an individual retirement account (IRA), and the possible credit that comes with them. Here's what you need to know, and why I consider this the best tax break of all.

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2016 IRA contributions can still be made until April 18

The deduction for traditional IRA contributions is one that can still be used in 2017, to be applied to your 2016 tax return. Specifically, the IRS allows contributions to an IRA until the regular tax deadline for each calendar year, and thanks to a Washington, D.C., holiday, the tax deadline is pushed back a few days in 2017 to April 18.

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For each of the 2016 and 2017 tax years, you're allowed to contribute up to $5,500 to your IRA, with an additional $1,000 catch-up contribution allowed per year if you're 50 or over. This limit is good for both traditional and Roth IRAs, and although Roth contributions don't qualify for a tax deduction, there are some other key benefits to these accounts that you should be aware of. It's also important to point out that this is a combined limit for all of your IRAs -- in other words, if you have two different IRAs, your total contributions for the tax year cannot exceed these limits.

This can be especially good news for new investors who don't currently have an IRA, as it effectively means that you can "double up" on your contributions in 2017. Since you can still make your 2016 contributions, this means that you could potentially set aside up to $11,000 ($13,000 if over 50) in an IRA in 2017.

If you don't yet have an IRA, check out The Motley Fool's IRA center to help you get started.

How much of a tax break are we talking about?

Traditional IRA contributions can get you a big tax break. If you're under 50 and contribute the maximum of $5,500, this translates to $1,375 off of your 2016 tax bill if you're in the 25% tax bracket. Also, this is an above-the-line deduction, which means that you can take advantage whether you itemize deductions on your tax return or not.

If you or your spouse are eligible to participate in a retirement plan at work, your ability to take a deduction is limited by your income. If you are covered by an employer's plan, your ability to take a deduction phases out at these income (AGI) limits. If you fall within the respective income range for your filing status, you are eligible for a partial deduction.

Data source: Internal Revenue Service.

If you aren't covered by an employer's plan, your ability to take the deduction is limited only if your spouse is covered:

Data source: Internal Revenue Service.

An extra bonus for low- to moderate-income taxpayers

As a bonus, if your income is below $61,500 if you file a joint return, or $30,750 if you're single, you might qualify for the Retirement Savings Contributions Credit, also known as the Saver's Credit. It can be worth up to 50% of your first $2,000 in retirement contributions each year ($4,000 for couples). This could give you extra incentive to save money if you qualify -- after all, this is literally free money just for saving for your own retirement.

Here's the income chart and credit percentages for the 2016 tax year:

Data source: Internal Revenue Service.

The best tax break of all -- a bigger refund now, and a nest egg later

I've written before that I consider the tax incentives for retirement saving to be, hands-down, the best tax breaks of all. Not only can you lower your tax bill now, but you'll also be setting yourself up for financial comfort years down the road.

As a final thought, consider that if you contribute $5,500 to an IRA for 35 years, based on the stock market's historical average performance, you could be sitting on a nest egg of more than $1.3 million. And you'll have enjoyed some nice tax savings along the way. In my mind, this is as close to a financial no-brainer as you can get.

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