3 ways the IRS pays you to save


Saving for retirement and other long-term financial goals can be extremely hard, and the fact that the IRS taxes your income is one reason why many Americans don't have enough left over to save. However, what many people don't know is that the IRS will actually pay you to save, and those of all income levels can benefit from at least some of these favorable tax provision.

Below, we'll look at three ways that the IRS pays you to save. Take a look and figure out which one -- or more! -- will work best for you and your financial situation.

1. Up-front deductions for traditional IRA contributions

The most obvious tax break that the IRS offers savers is one that's quite familiar to many last-minute tax filers. When you make a contribution to a traditional IRA, most taxpayers can deduct their contribution from their gross income. The net result is a reduction in your tax bill that can in some cases be greater than 40% of the amount that you contribute. Moreover, the deduction is one of the only breaks that's still available now for the 2016 tax year, with IRA contributions for 2016 allowed through the mid-April filing deadlines.

There are limits on the use of traditional IRAs. Maximum contributions for 2016 and 2017 are $5,500 if you're younger than 50 and $6,500 if you're 50 or older. More importantly, if you or a spouse is covered by an employer-sponsored retirement plan at work, then your IRA deduction might be limited or eliminated if your income exceeds certain levels. Nevertheless, with so much flexibility, IRA contributions are a great way to give yourself a reward for saving.

See 13 states that tax Social Security benefits:

13 PHOTOS
The 13 states that tax Social Security benefits
See Gallery
The 13 states that tax Social Security benefits

Colorado

(Adventure_Photo via Getty Images)

Connecticut

(SeanPavonePhoto via Getty Images)

Kansas

(Davel5957 via Getty Images)

Minnesota

(Davel5957 via Getty Images)

Missouri

(JByard via Getty Images)

Montana

(Ron Reiring via Getty Images)

Nebraska

(Walter Bibikow via Getty Images)

New Mexico

(Joel Bennett via Getty Images)

North Dakota

(Ben Harding)

Rhode Island

(shutterstock)

Utah

(shutterstock)

Vermont

(DenisTangneyJr via Getty Images)

West Virginia

(DarrenFisher via Getty Images)

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

2. Income exclusion for 401(k) contributions

Similarly, the IRS gives tax incentives to those who use 401(k) plans and other employer-sponsored retirement plans at work. The mechanics of how 401(k) contributions work is slightly different, but the net result is the same. With 401(k) contributions, money is taken out of your paycheck before you ever see it and deposited into your account with your employer. That money reduces the amount of taxable income for federal tax purposes that your employer reports to the IRS on your W-2. Therefore, you don't have to take a deduction on your tax return, because the amount already got excluded when your employer set it aside as you instructed.

No income limits apply to 401(k) contributions, and the limits are much higher, with maximum contributions of $18,000 in 2016 and 2017 for those under 50 and $24,000 for those 50 or older. The only downside is that you can only reduce your income in the year in which you contribute, so it's too late now to do anything to cut your 2016 tax bill. What you do now, however, can make an even bigger difference in what you pay in taxes in 2017.

3. Retirement Savings Contributions Credit for low- and mid-income taxpayers

The IRS does something extra for people with relatively modest incomes who make contributions to IRAs and 401(k)s. If your income is below certain levels, then the IRS offers a credit of between 10% and 50% for the first $2,000 you contribute. This provision is known as the Retirement Savings Contributions Credit, or Saver's Credit for short. In effect, the Saver's Credit looks like a matching contribution from the federal government, and it comes in addition to any matching that your employer might offer.

The amount of the credit depends on your income and filing status, with singles having adjusted gross income of up to $31,000 and joint filers with income up to $62,000 potentially being eligible. You can get the full details on the Saver's Credit here, but you have to remember to file the necessary paperwork in order to get what can be up to an extra $1,000 off your tax bill.

It's hard to save, but these three provisions from the IRS can give a boost to your savings strategy. Take advantage of them and pay a little less come tax time.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.​​​​​​

States with the Highest and Lowest Taxes

Where you live can help or hinder your ability to make ends meet. A myriad of taxes—property, license, state and local sales, property, inheritance, estate and excise taxes on gasoline—eat away at your disposable income. Weighing the tax landscape against your financial picture lets you stretch your dollars.

Read More

Brought to you by TurboTax.com

Top 5 Reasons to Adjust Your W-4 Withholding

Common lifestyle changes, like getting a job or getting married, can change your tax liability. To avoid being caught off guard by an unexpected tax bill or huge tax refund, you'll need to adjust your withholdings on your paycheck.

Read More

Brought to you by TurboTax.com

Fatten Your Paycheck and Still Get a Tax Refund

If you usually get a tax refund, but would like to start putting more money in your pocket every month, we can help. Yes, you still have to fill out a W-4 form. But we've developed a quick and easy guide to assist you.

Read More

Brought to you by TurboTax.com

9 Things You Didn't Know Were Tax Deductions

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.