he only certainties in life, according to Benjamin Franklin, are death and taxes. But most working parents today face a third certainty: child-care expenses.        Almost 60% of women with children younger than six will work outside the home by the year 2000, as will two-thirds of women with school-age children. As a result, child care has fast become a top priority and expense. Fortunately, parents can save some money through two child-care-oriented tax programs: the federal child and dependent care tax credit, or a dependent care assistance program (DCAP). Which one is right for your family? Here's a guide to the respective rules, benefits, and caveats of each program. By using these programs wisely, you can make the most of your child-care dollar.

Federal tax credit: Help? From the IRS? The federal child and dependent care tax credit allows working parents with taxable earnings to deduct a portion of their child-care expenses from their federal income taxes. The credit, which taxpayers claim on the annual tax forms due April 15, saved Americans $2.8 billion in taxes in 1994. To qualify for the credit: Both parents in a dual-income family or the head of a single-parent household must be working. The child in care must be younger than 13. Parents must include on their tax forms the Social Security number or taxpayer identification number of their child-care provider. Payments to "off-the-books" providers don't qualify for the credit.        Allowable child-care expenses are limited to $2,400 for one child or $4,800 for two or more children. The credit starts at 30% of expenses for families earning less than $10,000, and shrinks one percentage point for every additional $2,000 of income. The minimum credit is 20% for families earning more than $28,000.        Let's do the math. The maximum credit a family can receive at the 20% level is $480 for one child ($2,400 x .20) and $960 for two ($4,800 x .20). At the 30% level, the credit tops out at $720 for one child and $1,440 for two. Taxpayers subtract these amounts from the total taxes owed, reducing the overall tax bill.

DCAPs: pretax and mighty popular Unlike the federal tax credit, which most working parents can use, DCAPs are more limited because some companies provide them as a benefit to their employees. If your company doesn't offer a DCAP, your only option is the federal tax credit. But according to a 1996 Mercer survey, DCAPs are the most prevalent form of employer support for child care.        Also known as flexible spending accounts (FSAs) and Section 125, DCAPs allow employees to set aside up to $5,000 of pretax earnings to pay for child care for dependents younger than 13. The amount withheld is not subject to federal, state, and Social Security taxes. To participate in a DCAP, employees must: Enroll during an established registration period every year. Designate an amount to be deducted from each paycheck. Submit their child-care bill to the DCAP administrator, who then either reimburses the employee or pays the child-care provider directly using employee withholdings. Include on their tax forms the Social Security number or taxpayer identification number of their child-care provider.        Employees save money because DCAP withholdings reduce their taxable income dollar for dollar. Companies save money because they don't pay their portion of Social Security taxes that otherwise would be due on the amount withheld.        However, DCAPs are a use-it-or-lose-it proposition. If you withhold an amount more than your child-care expenses, you lose the balance at the end of the year. The reasoning is that child care is a fairly stable, periodic expense; parents should be able to track their contributions closely to their costs.

Dependent care assistance program (DCAP) withholdings reduce taxable income dollar for dollar.

Making the best of both worlds Usually, parents opt for either the DCAP or the tax credit. However, there are instances when you can use them both, says Diana Reace, a consultant in research practice at Hewitt Associates, a benefits-consulting firm in Lincolnshire, Ill.        For example, say a family's annual child-care bill for two children is $5,200, but the mother's benefit plan allows her to set aside only $3,000 in a DCAP. The family still can claim $1,800 in expenses for the federal tax credit ($3,000 + $1,800 = $4,800 limit for two children). Always keep the maximum amounts in mind; if you withhold at least $2,400 for one child or $4,800 for two or more in a DCAP, you are ineligible for the tax credit.

In defense of the DCAP Which option is best for your family? Consider these general rules. According to Hewitt Associates, a DCAP usually is the better option when: A family earns more than $24,000. A family's income is so low it excludes them from paying federal income taxes. Child-care expenses exceed the maximums allowed for the tax credit ($2,400 for one child, $4,800 for two or more).        Parents typically prefer DCAPs because they receive ongoing tax savings with every paycheck. "They're having less taxes withheld because of it (the DCAP)," says Reace. "They're getting money back quicker than waiting until the end of the year to fill out the form and get it as an after-tax credit."        DCAPs also can be convenient. Vicki Reinecke, a senior account assistant at Bigelow Labs in West Boothbay Harbor, Maine, was one of six new mothers at the company when it established a DCAP for workers. Because all six mothers chose the same day-care facility, the lab paid the day-care center with one lump-sum check every two weeks. "It was just an easier program to work with," Reinecke says. "I liked it because I could turn in my voucher and the business office took care of paying the center. It was one less headache for me, and I didn't have to do all the record keeping."

Giving the federal tax credit its due However, DCAPs do have drawbacks that may make the federal tax credit a better option for your family. For lower-income employees, DCAP withholdings might be too steep and have too great an impact on future Social Security benefits. And, as mentioned previously, DCAP participants lose any excess withholdings at year's end.        Also, DCAPs have a one- or two-month lag time at the start, during which time parents must not only withhold money but pay their child-care provider out of pocket. "You're making double payments the first few months," says Therese Papiernik, a payroll manager at Armour Swift-Eckrich in Downers Grove, Ill. "You don't get the reimbursement until there's money in the account to withdraw. Some people find that to be a stretch." Pacific Community Credit Union savings can help you fill the gap.        Double payments and the use-or-lose clause were sufficient reasons for Karen and Brett Brickman of Robertsville, Mo., to choose the federal tax credit for now. First-time parents, they weren't sure what their child-care expenses would be. So they'll use the tax credit this year until the next enrollment period for DCAP rolls around where Karen works. "I didn't want to put in money that we'd be unable to get back," says Karen Brickman. "We just didn't know how well it was going to work."        If it's a close call between DCAP and the federal tax credit, your state tax rate can make a difference. Twenty-five states, plus the District of Columbia, offer breaks for child care on state taxes. Minnesota offers residents the full amount of the federal credit, meaning qualifying parents can save up to $1,440 on their state taxes. Several states have a refundable credit, which gives money back to low-income families who often don't benefit from the federal tax credit.

You make the call Still have questions? Ask your benefits manager or payroll department for help. Companies that offer DCAPs are obligated to inform employees about the federal child and dependent care tax credit and provide materials that describe when the federal tax credit might be more advantageous.        However, each family's financial and tax situation is different. Sit down and work the numbers. Only you can decide, with certainty, which option is more comfortable and best meets your family's needs.

Americans saved $2.8 billion in taxes in 1994 by using the federal child-care tax credit.

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