- Head of household filing status
- Exemption deduction for the grandchild
- Earned income tax credit
- Child tax credit
- Childcare credit for certain working grandparents
- Grandchild education credits and deductions
More and more individuals who thought their child-rearing days were over are now raising their grandchildren. The U.S. Census Bureau has found that there were 7 million grandparents whose grandchildren younger than 18 were living with them in 2010. Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Grandparents in this challenging situation should be aware that a variety of tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These include:
- Head of household filing status – An unmarried grandparent may be eligible to use head of household as his or her filing status. This filing status generally is more favorable than the single filing status. To qualify, the grandparent must maintain a household that is the principal place of abode for the grandchild for more than half the year. Generally the grandchild must not be self-supporting and under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled.
- Exemption for the grandchild – If the grandchild qualifies as the grandparent’s dependent, the grandparent is entitled to a deduction equal to the exemption amount, which for 2014 is $3,950 (up from $3,900 in 2013). For a grandchild to qualify as a dependent, the grandchild generally must meet the definition of a “qualifying child,” which includes being under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled, and a U.S. citizen, U.S. National, or a resident of the U.S., Canada, or Mexico. The grandchild may not have provided more than half of his or her own support. Additional rules apply if the grandchild is married.
- Earned income credit – A grandparent who is working and has a grandchild who is a qualifying child living with him or her may be able to take the earned income tax credit (EITC), even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn’t provide more than half of his own support.
To qualify for EITC for 2013 on account of a grandchild or grandchildren, a taxpayer’s adjusted gross income (AGI) must be less than: $46,227 ($51,567 for married filing jointly) if he or she has three or more qualifying children; $43,038 ($48,378 for married filing jointly) if he or she has two qualifying children; and $37,870 ($43,210 for married filing jointly) if he or she has one qualifying child. There’s no EITC if the taxpayer files as married filing separately, isn’t a U.S. citizen or resident alien all year, files Form 2555 or Form 2555-EZ (relating to foreign earned income), doesn’t have earned income, or has more than $3,300 of investment income for 2013 ($3,350 for 2014).
- Child tax credit – A grandparent who is raising a grandchild may be able to take the $1,000 child tax credit and, under specific circumstances, the credit may be refundable.
To qualify, the grandchild must be under the age of 17, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers.
- Credit for grandchild care expenses – A grandparent may also qualify for the child and dependent care credit if the grandparent pays someone to care for a dependent grandchild under the age of 13 or a grandchild who is physically or mentally not able to care for himself or herself, and the grandparent works or looks for work and has the same principal place of abode as the grandparent for more than half the tax year.
The credit is 35% of employment-related expenses for taxpayers with an AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. The maximum amount of employment-related expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program.
- Grandchild education expenses – There are a number of tax breaks that may be available to a grandparent who pays his or her dependent grandchild’s education costs. These include:
o Education credits – An individual taxpayer may claim an income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (up to $2,000) for higher education expenses of a grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of undergraduate education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at “eligible educational institutions.” Both credits can’t be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers.
o Deduction for interest on qualified education loans – Grandparents may qualify to claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan for any debt incurred by the taxpayer solely to pay qualified higher education expenses for a grandchild, who is at least a half-time student. The deduction phases out for higher-income taxpayers.
These education tax benefits only apply to a grandparent who claims the grandchild as a dependent. Many generous grandparents pay these types of expenses for a non-dependent grandchild, but unfortunately, they get no tax breaks for doing so.
- Medical and dental expenses – A grandparent who itemizes deductions can deduct certain unreimbursed medical and dental expenses paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that they exceed 10% of the grandparent’s adjusted gross income for the year. Where a grandparent is age 65 or older, the 10% is reduced to 7.5% through 2016.
The foregoing is an overview of the tax benefits available to grandparents. Not all limits and requirements were covered in complete detail. Please contact this office to determine if you qualify for one or more of them.