Many taxpayers don’t realize they can reduce their tax burden for the previous year in the first few months of the year. Two of the ways to do that is to make contributions to traditional Individual Retirement Account (IRA) and, if qualified, take advantage of the Saver’s Tax Credit. Both options are permitted by the Internal Revenue Service up until the tax filing deadline, April 15.

Contributions to a traditional IRA are tax deductible, which lowers your taxable income. For the 2008 tax year the IRS allows contributions up to $5,000 or $6,000 if your over age 50.   Let’s say you contributed $1,000 to your IRA, it would lower your taxable income by $250 if you were in the 25 percent tax bracket.

When making a contribution in the first few months be sure to indicate the tax year on your IRA contributions. If you don’t, the contribution will be posted to the wrong year. To prevent this error, indicate the tax year directly on the face of the check or indicate the year in your fund transaction instructions when moving them from a non-IRA account.

Another overlooked federal tax credit is the Saver’s Tax Credit. Established in 2002, it was formulated to help low-to-moderate income employees contribute to IRAs.  The Saver’s Tax Credit allows a credit of up to $1,000 ($2,000 for filing jointly) to reduce federal income tax.

Unlike a tax deduction, the Saver’s Tax Credit will directly lower your tax bill. So a $1,000 tax credit lowers your tax bill by a full $1,000.  To file the Saver’s Tax Credit use IRS Form 8800.

Here are some other things to know about making IRA contributions:

• Traditional IRAs are not taxed until you receive distributions from that IRA.
• You cannot deduct an IRA contribution or take advantage of the Saver’s Tax Credit on Form 1040EZ; you must use either Form 1040A or Form 1040.
• To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.
• You must have taxable compensation, such as wages, salaries, commissions and tips. If you file a joint return, only one of you needs to have compensation.

It’s important to understand and take advantage of the options available to reduce your tax liability - especially those that are often overlooked.