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An IRA Account Can Increase Your Tax Refund by Thousands of Dollars

If you want to increase your tax refund by thousands of dollars, the easiest way to do so is to open and fund an IRA account before April 15. The math on this is simple.

Let's say you're married filing jointly and that your combined taxable income for 2013 was $90,000. If neither you nor your spouse contributed to a workplace retirement plan, you're each entitled to deduct $5,500 from your gross income to contribute to a traditional IRA account. That adds up to $11,000 and thereby reduces your taxable income to $79,000.

Here's where the magic comes in. Without this deduction, you would owe $14,358 in taxes for the 2013 calendar year. This would equate to 16% of your taxable income. By contrast, with the deduction, your tax liability would drop to $11,608, or 12.9%, of your taxable income.

In other words, under this scenario, all you have to do to save yourself $2,750 (and thereby increase your tax refund by a commiserate amount if you're subject to withholdings) is to transfer $11,000 from one account under your control -- say, for example, your savings account -- to another -- your IRA account.

Now, just to be clear, there are a handful of rules that govern how the IRA deduction works.

In the first case, it's important to keep in mind that there are two types of IRAs -- traditional and Roth. A traditional IRA, which is what I've discussed, allows qualified taxpayers to take an immediate deduction. A oth IRA, on the other hand, doesn't provide for a deduction this year, but it allows the assets therein to grow tax-free -- click here to learn more about Roth IRAs.

A second thing to be aware of is that there's a limit to how much you can contribute to an IRA account and thereby deduct on your tax return. The maximum limit for 2013 is $5,500 per taxpayer. But this is assuming that neither you nor your spouse contributed to a tax-advantaged retirement account at work -- most commonly, a 401(k).

Additionally, the deduction phases out at higher income levels. If you're married filing jointly, the two thresholds are modified adjusted gross incomes of $95,000 and $115,000. If your modified AGI is below the former, you can take the full deduction. If it exceeds the latter, you can't take any. In between the two, you're entitled to a partial deduction -- see the IRS's official explanation here.

Exceptions aside, it's irrational not to take advantage of an IRA account if you have the ability to do so. It's effectively free money that's just waiting for you to claim it. As a result, if you haven't already pulled the trigger on this, you still have until April 15 to make the decision.

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John Maxfield
JohnMaxfield37

John has written for The Motley Fool since 2011. He has a bachelor's degree in economics from Lewis and Clark College and a juris doctorate from Southern Methodist University. View John Maxfield's profile on LinkedIn

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