Spring 2007 Volume 4, Number 1

How Raising Grandchildren Can Impact your Federal Tax Return

J. Lynn McMahan
Senior Tax Specialist
IRS/SPEC - St. Louis
314-612-4532
Janet.L.McMahan@irs.gov
 

Generally, tax credits reduce the amount of tax you owe. Some credits may create a refund, even if you pay little or no tax. As grandparents, you often do not realize you may be eligible for some of these tax benefits if you are responsible for raising a grandchild or other qualifying relative.

In addition to claiming a personal exemption for you and your spouse, if applicable, you may be eligible to claim dependent exemptions on your federal tax return. Consider the possibility if your grandchild meets the following general criteria:

• The child is a descendent of your child, stepchild, sibling or step-sibling

• The child is under age 19 OR under age 24 and a full-time student for some part of the year.

• The child does not provide more than half of his or her own support.

• The child lived with you for more than half the year.

• The child is not married.

The Earned Income Credit (EIC) is another credit that may be available if you are working, your earnings were less than $38,000 in 2006, and you have at least one qualifying child (which could be a grandchild). If you have a qualifying child, there is no requirement to be under age 65. Taxpayers who do not have a qualifying child must be under 65 years of age and earning a low income. The EIC may create a refund even if you paid little or no taxes.

You may be eligible for the Child Tax Credit (CTC) if you have a qualifying child under the age of 17. The total credit may be as much as $1000 per eligible child and provide a refund even if you paid little or no taxes.

The credit for Child and Dependent Care Expenses may be available if you pay for child care for a dependent under age 13 or for care for your spouse or dependent who is unable to care for himself or herself while you work or look for work. This is a credit for a portion of your unreimbursed out-of-pocket expenses.

Foster care payments are payments for providing care to a foster child in your home and are considered support of that child and not taxable. However, if you are paid to maintain space in your home for emergency foster care, you must include those payments in your income for federal tax
purposes.

The Foster Grandparent Program is one of the National Senior Service Corps programs. Income from this program is for supportive services or reimbursement for out-of-pocket expenses and should not be included in your income for federal tax purposes.

Other expenses that may be deductible include medical and dental expenses and certain education expenses that you paid for yourself, your spouse, and/or any individual you can claim as a dependent.
Additional information on any of these topics can be obtained at www.irs.gov or by calling toll-free 1-800-TAX-1040  (1-800-829-1040).