If you are looking for tax breaks for grandparents, you are not alone! More and more individuals who thought their child-rearing days were over are now raising their grandchildren. It is estimated that 6.5 million children in the United States currently live with at least one grandparent. This accounts for approximately 9% of all children nationally, and more than half of those not living with their parents.
Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Thus grandparents in this challenging situation should be aware that a variety of tax breaks may be available to them. Altogether, these tax breaks are designed to help ease the financial burden of becoming primary caregivers for grandchildren.
The most common tax breaks for grandparents include:
Head of household filing status
An unmarried grandparent may be eligible to use the head of household 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 home for the grandchild for <50% the year. Also the grandchild must not be self-supporting and must be under the age of 19 at the close of the tax year. (Or under the age of 24 if they are a full-time student). Another factor could include if the grandchild is permanently and totally disabled.
Earned income credit
A working grandparent who has a qualifying grandchild living with him/her may 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 be considered a dependent.
To qualify for EITC on account of a grandchild, a taxpayer’s adjusted gross income must be less than the following:
- $51,464 ($57,414 for married filing jointly) if he or she has three or more qualifying children;
- $47,915 ($53,865 for married filing jointly) if he or she has two qualifying children; and
- $42,158 $48,108 for married filing jointly) if he or she has one qualifying child.
There’s no EITC if the following is true:
- the taxpayer files as married filing separately
- or isn’t a U.S. citizen or resident alien all year
- or files Form 2555 or Form 2555-EZ (relating to foreign earned income),
- doesn’t have earned income,
- or has more than $10,000 of investment income for 2021 ($3,650 for 2020).
Child tax credit
A grandparent raising a grandchild may qualify for a $2,000 child tax credit. And under certain specific circumstances, up to $1,400 of the credit may be refundable.
But to qualify, the grandchild must be under the age of 17, a U.S. citizen or resident alien, and the grandparent’s dependent. In addition, the child tax credit is reduced for higher-income taxpayers.
Note: For 2021 only, as part of the COVID relief, the child tax credit was increased to $3,000 for children under the age of 18 ($3,600 for children under age 6) and the credit is fully refundable.
Credit for grandchild care expenses
A grandparent may also qualify for the child and dependent care credit if childcare is involved. For example, if the grandparent pays someone to care for a dependent grandchild under the age of 13.
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 never 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 in the case of two or more qualifying individuals the amount is $6,000. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program.
Note: For 2021 only, as part of the COVID relief, the maximum amount of expenses that can be used to compute the credit is increased to $8,000 for one qualified individual and $16,000 for two or more qualified individuals, and the credit percentage is a full 50% the expenses before high-income phaseout and is fully refundable.
Educational tax breaks for grandparents include grandchild education expenses
There are a number of tax breaks that may be available to a grandparent who pays his/her grandchild’s education costs. These include:
Education credits
An individual taxpayer may claim 2 credits for higher education expenses of their dependent grandchild at accredited schools. An income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC). And they can claim the Lifetime Learning credit (up to $2,000). 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”. Credits can’t be claimed in the same tax year for any one student’s expenses. Also these credits phase out for higher-income taxpayers.
Deduction for interest on qualified education loans
Grandparents may qualify to claim a deduction for up to $2,500 of interest paid on a qualified higher education loan. This deduction is available if the debt incurred was solely to pay for education expenses for a dependent grandchild. But to qualify, that grandchild must be 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, if they don’t claim the child as a dependent they don’t get the tax breaks for doing so.
Medical and dental expense tax breaks for grandparents
A grandparent who itemizes deductions can deduct certain unreimbursed medical and dental expenses paid for a grandchild. As long as the grandchild is a considered an dependent. For this to happen we combine the grandchild’s medical expenses with the grandparent’s medical deductions. The deduction can happen if the total exceeds 7.5% of the grandparent’s adjusted gross income for the year.
This article is only overview of the tax benefits available to grandparents. Please contact this office to determine if you qualify for one or more of them.
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