MANAGING YOUR MONEY : PREPARE YOURSELF : 2 Tax Options Ease the Hurt of Child-Care Costs : Most people making over $10,000 will do better by choosing a ‘dependent care account.’

Child care--and the fees associated with it--is an inescapable cost of living for two-earner couples and single parents with small children. Recognizing this, Congress has given parents a couple of ways to cut their taxes to make the burden a little lighter.

The first option is a tax credit. Under the law, a taxpayer may take a credit against the taxes he or she owes for 30% of child-care expenses, up to a ceiling of $2,400 in expenses for one dependent or $4,800 for two or more dependents. Because every dollar of credit reduces your taxes by a dollar, this 30% credit can cut your tax bill by as much as $720 for a single dependent and $1,440 for two or more.

The second option is what is called a “dependent care account.” This is not available to everyone because it is a program that must be run by the taxpayer’s employer. Where it is available, it allows workers to pay up to $5,000 into a special account and then draw it out to reimburse themselves for child-care expenses. The tax benefit is that the contributions to the account are taken out of paychecks before taxes are figured--something like a tax deduction, even for people who don’t itemize deductions.

There are additional limits on both programs. The child cannot be over 13 years old (dependent adults who cannot care for themselves can qualify). To qualify for the tax credit, you have to give the Internal Revenue Service the name, address and taxpayer identification number of the child-care provider, and your employer must collect such information before releasing funds from a dependent care account.

But assuming you could chose either one--and you must chose, because you cannot use both--which is the better deal?

The short answer, according to benefits experts at A. Foster Higgins & Co., a consulting firm based in Princeton, N.J., is that the tax credit is better if you make less than $10,000 a year.

While “there’s always an isolated case where it doesn’t work out” that way, the vast majority of taxpayers who make more than $10,000 will do better, often much better, with the dependent care account, George Faulkner of Foster Higgins said.

Annual savings range considerably, though. For example, both married and single taxpayers earning $26,000 a year would save only $31 by using a dependent care account instead of the tax credit.

At the other extreme, according to Faulkner’s calculations, a single parent with one child earning between $40,000 and $50,000 and a couple earning $50,000 would be $1,231 better off with the dependent care account.

The reasons for the disparity are complex, Faulkner said, relating to the way tax brackets and Social Security (FICA) taxes work. For example, the dependent care account saves more money for people earning $50,000 or less than it does for those earning more because it reduces Social Security-Medicare as well as income taxes.

Also, because the tax credit is much smaller for one child than for two, while the dependent care account has the same limit no matter how many children, taxpayers with one child and expenses of more than $2,400 are plainly better off with the account.

There are some disadvantages to the dependent care account, however.

Faulkner noted that in the first month, the taxpayer has to make a double payment: one to the dependent care fund, another to the child care provider. It’s only a month or so later that the reimbursement for the provider payment arrives. That delay can be tough for the person who needs every penny just to put food on the table.

In addition, the dependent care account contains a “use-it-or-lose-it” provision that is required by the IRS. This means that if you overestimate your expenses and don’t use some of the money in your account, you can’t get it back.

Also, not every household can contribute the full $5,000. If one wage earner takes home less than $5,000 a year, the contribution is limited to his or her entire salary.

There is also the question of identifying the child-care provider, no matter which program you use. Many people use “informal” arrangements--meaning that the provider doesn’t report the income--and get a better price. This is illegal, but it is done, and people often find that switching to a legal provider costs more than the tax benefits save.

Assuming you are doing things legally and have a dependent care account option at your job, now is the time to start thinking about taking advantage of it. Foster Higgins notes that many employers require employees to sign up and determine how much they want to contribute for 1991 before the end of this year.

So now is the time to begin checking your records and projecting next year’s expenses and getting the forms from the benefits office. If you wait, you could miss out of hundreds of dollars in tax savings.