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Grandkids come with big tax benefits, if you're raising them

  • More than 2.5 million grandparents across the United States are raising their grandchildren, according to 2016 estimates from the Census Bureau.
  • If your grandchild qualifies as a dependent, it opens up more tax breaks for you.

When grandparents suddenly find themselves back in the child-rearing business, taxes are likely far from the forefront of their minds.

Nevertheless, it's well worth their time to explore tax breaks that could now be available, courtesy of their expanded role in their grandchild's life.

"If the child qualifies as a dependent, all tax deductions and credits that are available to the parent would be available to the grandparent," said Cari Weston, director of tax practice and ethics for the American Institute of CPAs.

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Tom Merton | Getty Images

More than 2.5 million grandparents across the United States are raising their grandchildren, according to 2016 estimates from the Census Bureau. The reasons are myriad, including the parent's death or absence (i.e., overseas for work or in prison), substance-abuse problems and mental-health issues.

For many grandparents, budgets are already squeezed when they take on the additional cost of raising a child. This can make tax breaks even more crucial in reducing the overall cost of taking on the job that the parent is unable to do.

"Most of us aren't tax-driven," said David Demming, a certified financial planner and president of Demming Financial Services in Aurora, Ohio. "This is about helping the grandchildren have a decent life."

By the numbers

Total grandparents living with grandchildren 7.27 million
Grandparents responsible for grandchildren 2.51 million
Age 30-59 while caring for grandchildren 1.48 million
Age 60 or older while caring for grandchildren 1.04 million
Source: U.S. Census Bureau, 2016 American Community Survey

Be sure, however, that you and the child's parents are on the same page.

"If grandparents are caring for a child due to drug or alcohol abuse or mental illness, you need to watch for the parent filing a tax return in advance of you and claiming the child first," Weston said.

Additionally, if you are still working, check with your employer to see if benefits are available that relate to raising kids, Weston said.

For instance, your company could offer dependent care flexible spending accounts or other programs available to help you with the costs of your newfound endeavor.

If you are receiving Social Security, Demming said, check whether your grandchild could also receive benefits.

Here are some tax aspects to consider.

The basics

To claim your new charge as a dependent, the child must be 18 or younger or, if a full-time student, under age 24. If the child is permanently and completely disabled, there is no age limit. In addition, the child must live with you for more than half the year (although there are some exceptions).

If your grandchild qualifies as a dependent, it opens up more tax breaks for you. Among them: For 2017, you can take a personal exemption of $4,050 for the dependent grandchild. The exemption begins phasing out for higher incomes.

Be aware that personal exemptions will disappear from 2018 through 2025, although the standard deduction will nearly double for all taxpayers during the same time.

Additionally, if your tax filing status has been single, bringing a dependent child into the mix allows you to file as head of household. This would mean a higher standard deduction — $9,350 for 2017 — along with a potentially lower tax rate.

Length of time responsible for child
Percent of all full-time caregiving grandparents
No more than 6 months 10.5 percent
6 months to 11 months 10.6 percent
1 year to 2 years 23 percent
3 years to 4 years 16.6 percent
5 years or more 39.3 percent
Source: U.S. Census Bureau, 2012 American Community Survey

Child tax credit

For your 2017 returns, this credit provides up to $1,000 for each dependent child under age 17, with income limits. For joint returns, the credit begins phasing out at adjusted gross income of $110,000. For single tax filers and heads of household, the credit begins phasing out at incomes of $75,000.

Also for 2017, if the amount of the credit exceeds the amount you owe, you might be eligible for a refund of the unused portion.

The child tax credit is expanded for tax years 2018 through 2025: It will double to $2,000 per child and the income limits will rise. For married couples filing jointly, the phaseout will start at $400,000, and for single filers and heads of household, $200,000. The eligible refundable portion also will go up.

Child and dependent care credit

This provides a tax break to reduce the cost of child care while you're working or looking for work. As long as your tax-filing status is not married filing separately and the child is under age 13, you can claim up to 35 percent (depending on your adjusted gross income) of your child-care expenses, with caps.

For one dependent, up to $3,000 of qualifying expenses can be used for the calculation. For two or more dependents, the expense cap is $6,000. If you use pretax dollars to pay for the care, that money cannot count toward your qualifying expenses.

Medical expenses deduction

For tax years 2017 and 2018, if your total out-of-pocket medical expenses — including those for your grandchild — exceeded 7.5 percent of your adjusted gross income, the amount above that threshold could be deductible. To take advantage of the deduction, however, you must itemize.

The 7.5 percent threshold will rise to 10 percent beginning in tax year 2019.

Education-related tax breaks

If you have a student loan for the child, you can deduct up to $2,500 in interest paid as long as your adjusted gross income is under $80,000 ($160,000 if married and filing jointly). You don't need to itemize to get this deduction.

Two education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit — are also available even if you do not itemize, although you cannot use both in the same tax year and they phase out at higher incomes. A variety of college costs — i.e., tuition, books and supplies — count toward the credit.

However, there are different limitations that apply to both, and your individual situation can determine which one makes sense to use.

It's worth noting that beginning in tax year 2018, student-loan debt forgiveness due to death or permanent and total disability will be excludable from income.

Also, when you do tax planning, remember that contributions to 529 education savings plans can be tax-deductible at the state level. These funds offer tax-free growth on investments and tax-free withdrawals for qualified education costs.

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