A dependent grandchild refers to a grandchild that is financially dependent on their grandparents. This situation can arise for several reasons, such as when the parents are unable or unwilling to care for the child, or if the grandparents have legal custody or guardianship.
Understanding what constitutes a dependent grandchild is important, as there are potential tax deductions and credits available in these situations.
When Grandchildren Qualify as Dependents
For a grandchild to qualify as a dependent of their grandparent, certain criteria must be met according to the IRS. The main requirements are:
The Grandchild Lived with the Grandparents
The grandchild must have lived with their grandparent for over half of the year. This can be the entire year or partial but has to exceed 6 months.
The Grandparent Provided Financial Support
The grandparent must have provided over half of the grandchild’s financial support for the year. This includes food, housing, clothing, education, medical expenses and more.
The Grandchild Meets Age and Relationship Requirements
The grandchild must be either under 19 years old or a full-time student under 24 years old. They need to be either the biological grandchild, adopted grandchild, step-grandchild, or foster grandchild.
Joint Custody Situations
If the grandparent shares custody with the child’s parents, the grandchild can still qualify if the grandparent provided over half of the total financial support, regardless of who claims the dependency exemption.
Benefits of Claiming a Dependent Grandchild
There are several tax benefits grandparents can receive for claiming a dependent grandchild:
Dependency Tax Exemption
This allows the grandparent to reduce their taxable income by up to $500 per dependent. To qualify for 2023, the grandparent’s income must be below $43,000 ($65,000 married filing jointly).
Child Tax Credit
For children under 17, this offers up to $2,000 in tax credits per child, depending on income. Up to $1,400 of it is refundable.
Child and Dependent Care Credit
This covers up to 35% of $3,000 in care expenses for a dependent child under 13 or a disabled dependent, allowing grandparents to work or look for work.
Earned Income Tax Credit
Having a dependent child opens up more EITC benefits. In 2023, this can mean over $6,000 in reduced taxes or refundable credits.
Head of Household Filing Status
Claiming a dependent child allows grandparents to file as Head of Household rather than Single or Married Filing Separately, offering higher standard deductions.
Requirements to Meet for Tax Benefits
While claiming a dependent grandchild can provide significant tax advantages, it also comes with specific IRS requirements:
The grandparent needs to have full legal and physical custody of the grandchild. Just providing financial support does not qualify.
If the child’s parents can claim them but choose not to, IRS Form 8332 must be signed by the parents releasing the exemption to the grandparents.
Proof of Support
Thorough records should be kept showing the grandparents provided over half the financial support, including receipts, bills, letters from public assistance agencies and more.
The dependent grandchild must be a U.S. citizen or resident alien, and have a Social Security number or Individual Taxpayer Identification Number (ITIN).
If custody is shared with parents, grandparents need to prove they supplied over half of the total support costs.
Meeting these requirements fully ensures grandparents legally qualify for all applicable tax benefits of claiming a dependent grandchild. Consulting a tax professional can help navigate the specifics.
Reasons Grandparents May Need to Claim Dependents
There are a variety of situations where grandparents wind up caring for their grandchildren. Some common reasons include:
Parental Job Loss or Financial Difficulties
If the parents lose employment or income, grandparents often take over care and financial support.
Parental Substance Abuse
Drug and alcohol abuse can make parents unable to properly care for their children, leading to grandparents providing care.
If a parent goes to jail or prison, their child often goes to live with and become dependent on grandparents.
Parental Divorce or Separation
Following a divorce or separation, children may live with grandparents if their parents are unable to care for them sufficiently.
Death of a Parent
The death of a parent commonly leads to grandparents becoming the primary caregivers and guardians.
Parental Neglect or Abandonment
Situations of parental neglect, abuse, or abandonment require grandparents to step in and assume custody.
Foster Care Placements
Children removed from parents in the foster system are often placed with grandparents rather than non-relatives.
If a military parent deploys abroad, children frequently stay with and become dependents of grandparents during their absence.
Obtaining Legal Custody as a Grandparent
If becoming the legal guardian or custodian of a grandchild is necessary, there are steps grandparents should take:
Consult an Attorney
Hiring a family law attorney experienced in custody cases is highly advised to understand state laws and processes.
Gather evidence documenting why the parents are unable or unfit to care for the child, such as police reports, drug tests, living conditions, and CPS reports.
File Petition with Family Court
The attorney can help file a petition requesting legal guardianship or custody be awarded to the grandparents. Courts will review the evidence.
Participate in Home Study
A court evaluator will do a home study reviewing the grandparents’ housing situation, finances, and ability to care for the child.
Attend Court Hearing
At the hearing, the judge will make a determination on custody based on evidence and what’s in the child’s best interest.
If approved, the new custody arrangement will be formalized through a court order legalizing the grandparents as guardians or custodians.
Consulting an attorney and understanding the proper procedures can help make obtaining custody more seamless. But the most important thing is ensuring the grandparents can provide a loving, stable home.
Preparing Financially for a Dependent Grandchild
Bringing a dependent grandchild into your home can impact finances, so preparations should be made:
Evaluate the current household budget and identify areas that need to be adjusted to account for the increased costs of caring for a child.
Increase Emergency Savings
Boost emergency and retirement savings to have an adequate cushion for unexpected expenses that may arise for the grandchild.
Try to lower outstanding debts as much as possible going into guardianship to free up cash flow for the child’s needs.
Explore Assistance Programs
Look into financial assistance programs like SNAP, WIC, TANF, subsidized housing and utilities, and free school meals.
Apply for Social Security
If the grandchild’s parents are deceased or disabled, apply for Social Security dependent benefits through their work records.
Seek Child Support
The parents may be ordered to pay child support to help cover costs. An attorney can assist with establishing this legally.
Discuss With Family
Talk to extended family about the situation to see if others can contribute financially or provide supplies like clothing and furniture.
Preparing adequately ensures grandparents can provide steadily for the grandchild’s needs without jeopardizing their own retirement savings. But the greatest gifts they offer are a loving home and family.
Becoming financially responsible for a grandchild can happen unexpectedly, but brings great rewards. Their care and well-being become the top priority. Understanding tax benefits, obtaining proper custody, and planning financially are key steps grandparents should take.
Despite the challenges, raising a grandchild reinforces family bonds for life. With proper support and resources, grandparents can successfully take on this important role.