How best to benefit from child-care tax breaks

Q I would like to know (since my wife and I disagree on this) whether having money deducted pre-tax for child-care expenses is any better than waiting until tax time and claiming all the expenses at once. Is it simply a matter of getting some money back sooner? Or can a significant savings be achieved?

J.M., Washington

A "You need to do a cost estimate," says David Bendix, who heads up Bendix Financial Group and is also a CPA.

The pre-tax deduction earmarks money for you. It also may lower your adjusted gross income (AGI) enough to let you kick in other itemized deductions, such as the health-insurance deduction, when you itemize on Schedule A. If you have an AGI of $60,000, for example, and medical deductions of $7,000, you can only itemize $2,500. ($60,000 x .075 = $4,500, subtract that amount from $7,000 and you get $2,500). But if you can get the AGI down to $50,000, for example, you can itemize $3,250 ($50,000 x .075= $3,750; $7,000 - $3,750 = $3,250).

On the other hand, taking the tax credit at income-tax time may give you a larger dollar saving. Asks Mr. Bendix: "What did you do for this past year?" Take pencil in hand and "compare how you would have come out using both methods."

Q What's the advantage of paying someone to do your taxes? Are not computer programs good enough?

Name withheld, Boston

A "An accountant can look ahead to the next tax year and find you potential savings, based on an overall financial plan," says Bendix. Most computer programs, by contrast, are geared to the current tax year.

Q What are "life only fixed immediate annuities?" How do they work? Who offers them?

S.I., Dillon, Mont.

A They are investment products that immediately give you a monthly payment based on a pre-set interest rate and your age. They kick in right away, upon payment; that's why they are called "immediate." They pay you during the course of your lifetime. The products are offered by most major mutual-fund groups and insurance companies.

We randomly called Fidelity Investments to check on rates. Currently, the rate of Fidelity's product, which requires a $25,000 investment, runs between 5 and 6 percent. The opposite of a fixed-rate annuity, which is based on bonds, is a "variable annuity," which is based on stocks. The latter is subject to market fluctuations.

(c) Copyright 2001. The Christian Science Monitor