If you think it's too late to lower your 2016 tax bill, think again. Traditional IRA contributions can still be deductible for 2016, but you need to act before the tax deadline. Here's what you need to know about the traditional IRA deduction and how much it could boost your tax refund (Hint: A lot).

The traditional IRA deduction

When it comes to IRA investing, most Americans have two main options: traditional or Roth. Roth IRA contributions are not tax-deductible, but eventual withdrawals in retirement are 100% tax-free. Plus, Roth IRAs have several other important advantages.

Jar of money labeled "retirement".

Image Source: Getty Images.

On the other hand, if it's more immediate tax savings you're after, traditional IRA contributions may be tax-deductible in the year they're made. If you're not sure which option is best for you, here's a discussion that could help you decide.

However, if you choose a traditional IRA, you want to be sure that you qualify for the deduction, so let's take a look at the rules. For the 2016 and 2017 tax years, you can contribute up to $5,500 to your traditional IRA (or up to $6,500 if you're aged 50 or older), so this could potentially be a big deduction. For example, if you contribute the full $5,500 and are in the 25% tax bracket, this can translate to an extra $1,375 in your pocket at tax time.

Do you qualify?

Since the purpose of the traditional IRA deduction is to help low- to moderate-income taxpayers, as well as all workers who don't have a retirement plan at work, the ability to take the deduction is restricted for certain individuals.

If you're covered by an employer's retirement plan, your ability to take the traditional IRA deduction depends on your adjusted gross income, or AGI. Here are the IRS' AGI income limits for the 2016 and 2017 tax years. If your income is below the lower number in your range, it means you qualify for a full traditional IRA deduction. If your AGI falls within the range, you can take a partial deduction.

Tax Filing Status

2016 Tax Year

2017 Tax Year

Single or head of household

$61,000-$71,000

$62,000-$72,000

Married filing jointly

$98,000-$118,000

$99,000-$119,000

Married filing separately

$0-$10,000

$0-$10,000

Source: IRS.

Now here's how it works if you're not covered by an employer's retirement plan. If you're single, there is no income limit; you're eligible to take a traditional IRA deduction regardless of how much you make. If you're married and don't have an employer's retirement plan, your traditional IRA deduction is only limited if your spouse is covered through their employer's plan.

Tax Filing Status

2016 Tax Year

2017 Tax Year

Single

No limit

No limit

Married filing jointly (spouse not covered by an employer's plan)

No limit

No limit

Married filing jointly (your spouse has a retirement plan)

$184,000-$194,000

$186,000-$196,000

Married filing separately (if your spouse is covered at work)

$0-$10,000

$0-$10,000

Source: IRS.

You could still use it on your 2016 tax return

You'll notice that in the last section, I listed the income limits for 2016 and 2017. That's not because this article is outdated; you can still get the tax deduction for your 2016 tax return.

One unique aspect of the traditional IRA deduction is that you can make your contribution up to the tax filing deadline for each tax year. In other words, you can make a traditional IRA contribution designated for the 2016 tax year until the April 18, 2017 filing deadline.

If you haven't done a great job of saving for your retirement so far, this could give you a chance to catch up. After all, you can make both your 2016 and 2017 traditional IRA contributions this year, for a total tax deduction of $11,000 (or $13,000 if you're 50 or older).

It's not really a deduction at all

The best part of the traditional IRA deduction is that it's technically not a deduction at all -- rather, it's an "adjustment to income." This means that you can take advantage of it regardless of whether you itemize deductions. Plus, it can help you qualify for other tax benefits, as it reduces your adjusted gross income (AGI), which several other tax breaks are based on.

OK, so I'll deposit $5,500 into an IRA. Then what?

This is the most common question I get asked after I explain the traditional IRA deduction.

Fortunately, IRA investing doesn't need to be difficult. A good place to start is a low-cost index fund, such as one that tracks the S&P 500. As you learn more about the market and build up a nice "base" of index funds, you can add some individual stocks into the mix if you so choose.

A great place to start is The Motley Fool's IRA Center, where you can compare brokers and learn more about how IRAs work and how to invest in them.

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