Article Highlights:
- 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.
- 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).
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
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 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.