It's time to give yourself a tax cut! Image source: Flickr user silly_little_man.

Everyone likes to cut their tax bill whenever they can, and with tax season upon us, millions of Americans are frantically looking for tax breaks they can take advantage of to pay less in April. There's a tax deduction that most Americans are eligible to take that can let you reduce your taxable income by thousands of dollars. Yet surprisingly, the vast majority of taxpayers pass up this lucrative tax break. Let's take a closer look at this deduction and whether you qualify for it.

IRAs and you
Many taxpayers know that one of the easiest ways to get a valuable tax break is to make a deductible contribution to a traditional IRA. For 2014 and 2015, those who have earned income from employment or from running their own business can contribute as much as $5,500 to an IRA, and unless you or your spouse is covered by another retirement plan such as a 401(k) plan at work, you can deduct up to the maximum contribution. Moreover, even if you are covered by an employer-sponsored retirement plan, you can still deduct your IRA contribution if you earn less than the income limits that the IRS sets each year:

Source: IRS.

Just because people know about the IRA deduction doesn't mean they take advantage of it, though. In the most recent year for which data is available, the IRS said that only about 2.6 million taxpayers claimed an IRA deduction, with total deductions amounting to about $11.8 billion. When you do the math, that comes to about $4,580 per return -- and that includes not only single filers but also the combined amount that joint filers contributed to IRAs for the year. Depending on your tax bracket, a $4,580 deduction can translate to tax savings of $458-$1,814. Yet with almost 145 million taxpayers filing returns, fewer than 2% of American households are taking advantage of the IRA deduction to contribute to their retirement accounts.

Putting even more money on the table
The IRA deduction isn't the only incentive that the IRS provides to save for retirement. The Retirement Savings Contributions Credit can put even more money in your pocket if you qualify, giving you a tax credit of between 10% and 50% of the first $2,000 you contribute to a qualifying retirement account. The credit isn't limited to IRA contributions: 401(k) contributions are also eligible. Even though the income restrictions are relatively strict -- you have to earn less than $30,000 if you're a single filer or $60,000 if you're married filing jointly to qualify at all -- the credit can put another $200-$1,000 in your pocket at tax time. About 6.9 million American taxpayers took advantage of the credit in the most recent year, and their credits amounted to more than $1.2 billion -- roughly $174 per return.

Source: IRS.

So, given all these rewards for saving for retirement, why don't more people use traditional IRAs? There are several reasons, some of which are good. First and foremost, if you have to choose between saving in a 401(k) and using an IRA, the 401(k) can be your best bet if your employer provides matching contributions for your own savings. I've never heard of a situation in which an employer gave workers any incentive for IRA contributions, so if money is tight and you can't afford to contribute to both an IRA and a 401(k), the 401(k) can be the smarter choice if it comes with free money from your employer.

Source: Ken Wilcox via Flickr.

Moreover, even among those who save in IRAs, Roth IRA contributions don't show up in the IRS data. That's because Roth IRA contributions aren't currently tax-deductible, instead giving you growth and income that avoid taxation entirely when you make withdrawals after you retire. In many cases, forgoing an up-front deduction is a good trade-off for never having to worry about income taxes again, and since you can qualify for the Retirement Savings Contributions Credit when using a Roth, you can make your decision based solely on whether the current tax deduction outweighs the potential tax benefits down the line.

In any case, the best attribute of a traditional IRA contribution is that you have until April 15 to make a deduction that counts against the 2014 tax year, meaning that you can get a deduction for the tax return you're about to file this tax season. Few other deductions have that flexibility. If you want to cut your taxes, consider whether a deductible IRA would be right for you.