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Collect all the tax breaks for grandparents

by on
in Small Business Tax Deduction Strategies

Are you raising a grandchild? It’s becoming a more common occurrence.

Strategy: Make sure you’re claiming all the tax benefits you’re entitled to. To help, the IRS recently updated Pub. 4694, “Raising Grandchildren May Impact Your Federal Taxes” at www.irs.gov/pub/irs-pdf/p4694.pdf.

What are we talking about? Consider the following list of tax breaks that might be available to the older generation.  

Head-of-household: This filing status is more favorable than single status. It may be available to a single grandparent who supports a “qualifying child.” The tax law defines a qualifying child of a taxpayer as one who:

  • Is related to the taxpayer (including grand­children)
  • Has the same abode for more than one-half of the year
  • Hasn’t reached age 19 by the end of the year (age 24 for a full-time student)
  • Doesn’t provide more than half of his or her own support.

Note: The qualifying child can’t be married by the end of the year or file a joint return.

Child tax credit: A grandparent may be able to claim the child tax credit (CTC) for a qualifying child. The child must be under age 17 and a U.S. citizen or resident.

For 2011, the CTC is $1,000, but it begins to phase out for joint filers with a MAGI above $110,000 ($75,000 for single filers).

Dependency exemption: A grandparent who provides more than half a grandchild’s support for the year may claim a dependency exemption for a qualifying child. For 2011, the exemption is $3,700 (up from $3,650 for 2010). Note: Dependency exemptions aren’t phased out for high-income taxpayers in 2011.

Child care credit: As a grandparent, you may qualify for the dependent care credit (commonly called the “child care credit”) if you pay someone to watch an under-age-13 child so you can be gainfully employed. The maximum credit is generally equal to 20% of the first $3,000 of expenses for one child or 20% of the first $6,000 of expenses to care for two or more under-age-13 children.

Earned income credit: A grandparent who is working and has a qualifying child living with him or her may be able to claim the earned income credit (EIC) even if the grandparent is age 65 or older. The EIC is determined by IRS tables. Note that the grandparent doesn’t necessarily have to provide more than half of the child’s support for this purpose.

Medical expenses: If a grandparent pays for a grandchild’s medical expenses, the unreimbursed expenses can be added to the grandparent’s annual total, subject to the usual 7.5%-of-AGI threshold.

Education expenses: Finally, you may be eligible for several education-related tax breaks (see box below).

Tip: Note that a qualifying child isn’t necessarily your dependent (see above), but that’s usually the case.  

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