Article Highlights:

  • Head of household filing status
  • Earned income tax credit
  • Child tax credit
  • Child care credit for certain working grandparents
  • Grandchild’s education credits
  • Medical and dental expenses

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, accounting 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. 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 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 place of abode for the grandchild for more than half the year. Generally, the grandchild must not be self-supporting and must be under the age of 19 (24 if a full-time student) at the close of the tax year or permanently and totally disabled.
  • Earned income tax 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. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn’t provide more than half of their own support.

To qualify for EITC for 2023 on account of a grandchild or grandchildren, a taxpayer’s adjusted gross income (AGI) must be less than: $56,838 ($63,398 for married filing jointly) if he or she has three or more qualifying children; $52,918($59,478 for married filing jointly) if he or she has two qualifying children; and $46,560 ($53,120 for married filing jointly) if he or she has one qualifying child. There’s no EITC if the taxpayer files as married filing separately, isn’t a U.S. citizen or resident alien all year, files Form 2555 (relating to foreign earned income), doesn’t have earned income, doesn’t have a valid Social Security number, or has more than $11,000 of investment income for 2023 ($10,300 for 2022).

  • Child tax credit – A grandparent who is raising a grandchild may qualify for a $2,000 child tax credit and, under certain specific circumstances, up to $1,600 of the credit may be refundable for 2023.

To qualify, the grandchild must be under the age of 17 as of the end of the year, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers.

  • 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 grandchild for more than half the tax year.

Eligible expenses include those for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten, while expenses to attend kindergarten or a higher grade aren’t allowed. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may qualify. Summer school and tutoring programs aren’t for care so their costs don’t count for the credit.

The credit is 35% of the eligible care 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 care expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program.

  • Grandchild’s 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, including:
    • 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 their dependent grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of higher education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at “eligible educational institutions.” Both credits can’t be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers.
    • 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 they incurred solely to pay qualified higher education expenses for a dependent grandchild, who is 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, they get no tax breaks for doing so.

  • Medical and dental expenses – A taxpayer who itemizes deductions can deduct certain unreimbursed medical and dental expenses, including those paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that the total exceeds 7.5% of the grandparent’s adjusted gross income for the year.

The foregoing is an overview of the tax advantages 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 these benefits.