Tax Breaks for Grandparents

Household Head Filing Status 

Grandparents who are unmarried may qualify to file as heads of household. It is generally more favorable to file as a joint applicant than as a single applicant. It is important for the grandparent to keep the house as the primary living space for the grandchild during at least half the year in order for the grandparent to be eligible for the program. A grandchild is generally not considered self-supporting if they are younger than 19 years old (24 if the grandchild is a full-time student) at the end of the tax year, or are totally and permanently disabled.



The Earned Income Tax Credit (EITC)

If the grandparent is 65 years of age or older and lives with a qualifying grandchild, the grandparent may be eligible to claim the (EITC). As a general rule, if you want your grandchild to qualify for the purposes of the EITC, you will need to meet the same requirements as a dependent. However, the child must not have supported themselves more than half of the time.

A taxpayer must have an adjusted gross income (AGI) below the amount of $51,464 in 2021 to qualify for EITCs on behalf of a grandchild or grandchildren. If the taxpayer qualifies for three or more children, then the taxpayer will qualify for the EITC; if the taxpayer has two or more qualifying children, the taxpayer will be entitled to $47,915. If there’s only one qualifying child, the taxpayer will be entitled to a tax benefit if they are married filing their tax returns jointly.

The EITC is not available to taxpayers who file jointly or separately, do not reside in the United States for the entire year, file Form 2555-EZ (pertaining to foreign earned income), don't earn income, or have more than $10,000 of investment income in 2021($3,650 for 2020).

Set up a free consultation with YokeTax to further understand the EITC.

Tax Credit for Children 

Depending on the circumstances, grandparents may be able to reclaim a maximum of $1,400 child tax credit when raising their grandchildren.

It is necessary for the grandchild to be under 17 years old and a U.S. citizen, as well as the grandparent's dependent. A higher income taxpayer receives a reduced credit.

Note: A refundable child tax credit of $3,000 is available to children under 18 years old only in 2021 ($3,600 to children under 6).

Grandchild Care Credit 

It is possible for a grandparent to receive a credit for child and dependent care if they pay for someone to take care of a teenage grandchild who requires assistance or a grandchild who cannot support themselves physically or mentally. They can also receive this credit if the grandparent works or looks for work and stays at the same house as the grandchild for at least half of the year.

Taxpayers with an AGI of less than $15,000 can claim a credit of 35% on employment-related expenses. With every $2,000 of AGI over $15,000 (or fraction thereof), the percentage decreases by 1%, but it never falls below 20%. For one qualifying individual, the maximum credit is $3,000, while for two or more individuals, the maximum credit is $6,000. Employers may exclude dependent care assistance programs from gross income by reducing these maximums dollar-for-dollar.

Note: The COVID relief will only apply through 2021, making the maximum credit amount $16,000 for more than one qualified individual instead of $8,000 for one qualified individual. Further, the credit is fully refundable and is 50% of the expenses before the phase-out period for high-income individuals.

Grandchild Education Expenses 

Grandparents who pay for their dependent grandchildren's education may qualify for tax benefits. The following are among them:

Education Credits 

For dependent grandchildren attending accredited post-secondary schools, the American Opportunity Tax Credit (AOTC) is available up to $2,500 per taxpayer, and the credit for Lifetime Learning is available up to $2,000 per taxpayer. For the undergraduate years, the AOTC applies to qualified expenses. For any student who attends an eligible educational institution after high school, the Lifetime Learning credit is available. Both credits cannot be claimed simultaneously, and they reduce for taxpayers with higher incomes.

If a grandparent has incurred a debt specifically for the purpose of paying qualified higher education expenses for their dependent grandchild who is enrolled at least half-time, they may be entitled to a deduction of up to $2,500 for interest paid on a qualified higher education loan. Higher-income taxpayers are not eligible for the deduction.

When a grandparent claims his or her grandchild as a dependent, the grandchild is eligible for these education tax benefits. However, grandparents do not receive tax breaks for paying these costs for non-dependent grandchildren. 

Medical and dental expenses 

It is possible for grandparents to deduct some prescriptions and dental expenses during the year for a dependent grandchild if they itemize deductions. The expenses incurred by the grandchild for medical treatment are combined with the expenses incurred by the grandparent for medical treatment, provided that the total of those expenses is greater than 7.5% of the grandparent's gross annual income.

Make use of a free consultation with YokeTax if you have further questions.