It is an unfortunate fact of modern day life that many parents are not able to care for their children. Often times the grandparents have to step in and raise those children. There are many reasons for this including drug addiction, broken marriages, mental illness, and the like. Nevertheless it is a fact of life today and many of us are affected by this.
The tax law provides a variety of tax breaks for these grandparents. So today I am going to briefly summarize some of them so you can worry less about money and focus more upon the love and care these grandchildren need .
- Earned Income Credit
The Internal Revenue Code may allow a grandparent , under certain circumstances, to receive a credit on a tax return if they have a qualified child living with them. The credit often runs between $3-6,000 depending on your income. This is a credit, a dollar for dollar reduction in taxes, and not a deduction. It can generate a refund too.
To be eligible, a grandparent must have earned income and that income must not exceed approximately $45,000. The grandparent can be married and can file jointly, but can’t file separate returns. In addition, the grandparent must be a US citizen or a resident alien.
- Child Tax Credit
The Code also allows a grandparent a tax credit of up to $1000 for each grandchild under age 17 who is a US citizen or resident , and who lives with you for more than 6 months and receives more than half of their support from you. This credit is also refundable, but is reduced if you earn more than $55,000 per grandparent (approx.).
- Child Care Expense Credit
Under certain circumstances a grandparent may receive a credit equal to 35% of the expenses paid in caring for a grandchild while the grandparent is at work or looking for work. The grandchild must live with the grandparent for at least six months of the year and be under the age of 13. Again, there are numerous restrictions and limitations based on your income which would require you to consult with competent tax advisor.
- Adoption expenses.
I’ve seen several cases where a grandparent, for variety of reasons, chooses to adopt a grandchild with or without the consent of the parent. Like all adoptions, these expenses can qualify for a credit of up to $13,570. There are special relaxed provisions for adoption of children with special needs. Again there are many restrictions which need to be carefully considered by your tax advisor.
- Education Expenses
There are a very large variety of tax deductions and other benefits that may be available to a grandparent who pays the expenses of educating a grandchild.
For example, there is a reduction in taxes for college expenses. This is called the American Opportunity Tax Credit and the Lifetime Learning Credit. There are also savings accounts that allow grandparents to fund education expenses. These programs include the Coverdell education savings accounts, qualified tuition programs (also known as section 529 plans) and certain kinds of US savings bonds (interest may be excluded from income). There are also special deductions for interest on qualified educational loans and certain above the line deductions for college education expenses. I am simply listing these here so that should you can go on to your tax advisor and study more about the specifics .
A grandparent who is raising a grandchild living in the home may, under certain circumstances, claim the child grandchild as a dependent. This would may allow the grandparent a deduction in the amount of $4050.
- Head of household
A single grandparent who is raising a grandchild may elect the head of household income tax rates, which are generally less than the single tax rates.
In order to claim head of household status, the grandchild must be living with you for more than six months and you must provide more than half of that grandchild’s support. In addition, there are certain age restrictions as the child must be less than 19, or is a student under age 24, or be disabled at any time during the year.
Folks, I hope this article is helpful for those of you undertaking the blessing of raising a grandchild. Good luck and my best to you.
David Leeper is a Board Certified federal tax attorney with 38 years of experience. He can be reached at 915-581-8748, by email at firstname.lastname@example.org, or visit leepertaxlaw.com