IRS Rules for Claiming Grandchildren as Dependents
Claiming grandchildren as dependents on your taxes can help lower your taxable income and provide tax savings. However, there are specific IRS rules and qualifications that need to be met in order to claim a grandchild.
This comprehensive guide will explain the requirements, tax benefits, and process for claiming grandchildren as dependents.
Who Qualifies as a Dependent?
The IRS has set guidelines on who can qualify as a dependent. In order to claim a grandchild as a dependent, they must meet the following criteria:
- Relationship Test – The grandchild must be either your daughter, son, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them (such as a grandchild, niece, or nephew).
- Residency Test – The grandchild must have lived with you for more than half of the tax year.
- Age Test – The grandchild must be either under 19 years old or a full-time student under 24 years old at the end of the tax year. There is no age limit if the grandchild is permanently disabled.
- Support Test – You must provide more than 50% of the grandchild’s total support for the year.
- Joint Return Test – The grandchild cannot file a joint return for the year.
- Citizenship Test – The grandchild must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico.
If the grandchild does not meet any of the above criteria, they do not qualify as your dependent.
Tax Benefits of Claiming a Grandchild
Claiming grandchildren who qualify can provide the following tax advantages:
- Lower Taxable Income – You can deduct $500 for each dependent from your income. This lowers your adjusted gross income and taxable income.
- Higher Standard Deduction – Your standard deduction increases by up to $500 for each dependent claimed. For 2023 taxes, this means up to $27,700 for married filing jointly and $20,800 for single filers.
- Child Tax Credit – For children under 17, you may qualify for a tax credit up to $2,000 per child.
- Earned Income Tax Credit – Having a dependent grandchild can increase your available Earned Income Tax Credit.
- Other Deductions and Credits – Claiming a dependent makes you eligible for other deductions like child and dependent care expenses.
In summary, claiming a dependent grandchild provides tax deductions and credits that can lower your overall tax bill.
Limits on the Number of Dependents
While claiming grandchildren can save you money, there are limits imposed by the IRS:
- You can only claim a child as a dependent if you are the child’s custodial parent. This means the child lived with you for more than half the year.
- The IRS does not set a limit on the number of dependents you can claim on your taxes. However, you can only claim multiple dependents if they all qualify based on the eligibility criteria.
- You and another taxpayer cannot both claim the same dependent in the same tax year. Typically, the custodial parent claims the child.
- If two taxpayers both paid over half the cost of supporting one child, the IRS tiebreaker rules apply. The taxpayer with the higher adjusted gross income gets to claim the child.
- There are phase-outs on tax credits and deductions with higher incomes, which can limit benefits with multiple dependents.
So in summary, you need to make sure each dependent, including grandchildren, meets all the qualification rules before claiming them.
Steps for Claiming a Grandchild as Dependent
Follow these key steps to properly claim a grandchild as a dependent:
1. Check if the grandchild is a qualifying child
Review the relationship, residency, age, support and joint return tests. The grandchild must pass all five to be a qualifying child dependent.
2. Verify you provided over half the grandchild’s support
Calculate the total cost of supporting the grandchild for the year including housing, food, medical expenses, clothing, education, travel, and other costs. Then tally up what you contributed either through direct expenses paid or by providing housing/meals. Your contributions must be more than 50% of the total support.
3. Have the tiebreaker rules on your side
If another taxpayer provided over half the support, the tiebreaker rules award the dependent to the person with the higher adjusted gross income.
4. Get the Social Security Number
When you file your taxes you must provide an SSN or Individual Taxpayer Identification Number (ITIN) for each dependent claimed. Apply for an ITIN if the grandchild is not eligible for an SSN.
5. Check eligibility for child-related credits
See if the grandchild qualifies you for tax credits like the Child Tax Credit or Earned Income Tax Credit which can further maximize your savings.
6. Claim the grandchild on your tax return
When filing your 1040 tax return, be sure to include the grandchild’s name, relationship, SSN/ITIN and months they lived with you on Schedule EIC if claiming relevant credits. Deduct $500 per dependent from your income.
7. Notify the parents
Coordinate with whoever else may try to claim the child to avoid any issues or delays in processing returns.
Some key things to keep in mind when claiming grandchildren:
- Get signed Form 8332 from the parents if they agree not to claim the child. This gives you legal right to the exemption.
- Maintain thorough records proving residency, support contributions, expenses, etc. in case you get audited.
- If support contributions are close to 50%, the exempt dollar amounts can factor in to help you meet the test.
- Temporary absences like summer camp or vacation do not disqualify the residency test as long as the main home was with you.
- Adopted grandchildren must live with you for the entire year to meet the residency test.
- If parents object, they have the first right to the exemption as the custodial parent.
- Special rules apply for children of divorced or separated parents per IRS Publication 501.
Despite the tax benefits, there are some potential drawbacks to consider when claiming grandchildren:
- Increased Audit Risk – A higher number of dependents raises your audit risk since its a frequently abused area. Maintain thorough records to validate qualifications if audited.
- Changes Eligibility for Deductions – Claiming dependents can make you ineligible for deductions like tuition and fee deductions.
- Impact on Financial Aid – Adding dependents can reduce student aid packages for college-bound grandchildren.
- Phase-Outs for Credits – At higher incomes, claiming multiple dependents can phase you out of tax credits quicker.
- No Impact on Filing Status – Dependent grandchildren do not change your filing status to the head of household.
- Parents May Object – Parents have the first claim and can cause problems if they do not agree to you claiming their child.
Claiming Grandchildren as Qualifying Relative
If a grandchild does not meet the qualifying child tests, they may still qualify as a dependent by meeting the qualifying relative criteria:
- Not a Qualifying Child Test – The grandchild cannot qualify as anyone’s qualifying child dependent.
- Member of Household or Relationship Test – The grandchild must either live with you all year or be directly related to you.
- Gross Income Test – Grandchildren must earn less than $4,500 in gross income.
- Support Test – You must pay more than 50% of the grandchild’s support.
However, unlike with qualifying children, you can only deduct $500 from your income for each qualifying relative. Credits like Child Tax Credit and Earned Income Credit no longer apply.
Losing Dependency Exemptions
There are certain situations when you may lose the ability to claim a grandchild as a dependent:
- The parents revoke Form 8332 – This declaration allows noncustodial relatives to claim the child. If revoked, only the parents can claim.
- You no longer provide over half the support – If your financial situation changes, and you fall below 50% support, you lose the exemption.
- The grandchild moves out of your home – To meet the residency test, the child must live with you for over half the year.
- The grandchild earns too much money – Dependents cannot have gross income above $4,500 (except qualifying children).
- The grandchild gets married – Once married, the grandchild can no longer be claimed as your dependent.
- Another taxpayer has higher AGI – If another taxpayer provides over half the support, they get priority based on higher AGI.
- You improperly claimed the grandchild – If you claim a grandchild incorrectly, the IRS may revoke the exemption with penalties.
Penalties for Incorrect Claims
The IRS does enforce penalties if you are found to wrongly claim a dependent:
- You will have to pay back any credits, like Child Tax Credit, that you received incorrectly.
- You may have to repay a portion of your tax refund related to the disallowed dependent exemption.
- You may face a 20% penalty on the disallowed credits unless you can show reasonable cause.
- In cases of fraud, you may face criminal penalties for willfully providing false information.
To avoid penalties, be absolutely sure your grandchild meets all dependent qualification tests before claiming them. Maintain thorough support records to validate eligibility if ever challenged.
Changes Under the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act eliminated personal and dependent exemptions but expanded the Child Tax Credit:
- No More $500 Deduction Per Dependent – Starting in 2018, taxpayers can no longer deduct $500 per dependent from their income.
- Higher Standard Deduction – The standard deduction has roughly doubled, reducing the benefits of itemizing dependent exemptions.
- Increased Child Tax Credit – The maximum credit doubled from $1,000 to $2,000 per qualifying child dependent under 17.
- Higher Phase-Outs – The income threshold for the Child Tax Credit phase-out increased significantly from $75,000 to $200,000 for single filers.
So while dependent exemptions are gone, claiming grandchildren can still provide net tax benefits through increased standard deduction and Child Tax Credit eligibility.
Claiming grandchildren as dependents can provide substantial tax savings through deductions, credits, and lower taxable income.
However, to avoid problems with the IRS and penalties, you must ensure the grandchild fully meets the relationship, residency, age, support and joint return tests.
Maintain thorough documentation to prove eligibility and consult a tax professional if you have any concerns. With proper planning, claiming grandchildren as dependents can become a smart tax move under the right circumstances.