Tax Benefits for Grandparents Raising Grandchildren
Grandparents raising their grandchildren may experience unique challenges as the primary caregiver. According to data from the 2021 American Community Survey, 2.74 million grandchildren in the United States were raised by at least one grandparent. As grandparents navigate the care of their grandchildren, they also face the usual aging considerations: retirement planning, estate planning, increased healthcare needs, and more.
Filing Status for Grandparent Caregivers
Caring for your grandchildren may introduce additional costs you might not have been expecting, such as education and day-to-day living expenses. The following tax considerations may help grandparents alleviate the financial burden of second-generation caregiving, but the first step is to determine whether you can claim your grandchild as a dependent.
Can you claim your grandchild as your dependent?
You can claim your grandchild as a dependent as long as they qualify, per the IRS. As a descendant of yours, the qualifying child must:
- Be a U.S. citizen, a U.S. resident alien, a U.S. national, or a resident of Canada or Mexico. Exceptions are made in certain adoption circumstances.
- Be under age 19 (if a full-time student, the age limit is under 24). If the child is permanently disabled, the age restriction does not apply.
- Live with you for more than half the year.
- Receive more than half of their financial support from you.
It is important to note that if the qualifying child is married, they cannot file a joint tax return with their spouse, except to claim an income tax withheld refund or file estimated tax paid.
File your taxes under Head of Household status.
If your grandchild is your dependent, you can also file under Head of Household status if you are unmarried and if you pay for more than half of the household expenses. Filing as Head of Household means that you can claim a greater standard deduction than if you were to file under Single status.
Tax Credits for Grandparents Raising Grandchildren
Take advantage of the Child Tax Credit.
For those with dependents under the age of 17, you may qualify for the Child Tax Credit. The Child Tax Credit allows for $2,000 per qualifying child if your modified adjusted gross income is $200,000 and below ($400,000 for joint filers). If your MAGI is above the income limits, the credit will be reduced by $50 for every $1,000 of income until it is phased out completely.
Look into the Child and Dependent Care Credit.
You may be eligible for the Child and Dependent Care Credit if your dependent is under the age of 13 and under the care of a provider while you are working or actively looking for work. The expenses paid must be “to assure the individual's well-being and protection,” per the IRS. The credit is a total of $3,000 for one qualifying individual and up to $6,000 for two or more individuals. If your employer also supplies childcare benefits that you exclude from gross income, these must be subtracted from the credit total.
How Grandparents Can Help Their Grandchildren Financially
If you cannot claim your grandchild as a dependent, there are still ways to assist them financially and receive tax benefits. For example, consider investing in a 529 plan or an ESA for their education. Update your estate plan to reflect your role as a caregiver, and ensure that your grandchildren are listed as beneficiaries if you wish.
If you need assistance figuring out how to best financially adapt to your caregiving responsibilities so that your grandchildren’s needs are met, please contact us.
Our financial advisors and tax professionals can give you advice based on your personal financial situation to ensure that you and your loved ones are taken care of.
Sincerely,
The Team at Chatterton & Associates
