Yours, mine and ours make for a full house – with possible tax benefits
When parents and boomerang kids move in, some might qualify as dependents
This morning, Barb took all the kids to school and later took her mother-in-law to the doctor. Tonight, Barb will share cooking duties with her 20-something stepson, who just moved into the family home with his toddler. Barb is officially part of the sandwich generation.
No matter how you slice it, Barb has some level of responsibility for three generations of her family at the same time. Depending on her and her husband’s specific situation, they might be eligible for some often overlooked tax benefits claiming dependents on taxes. There is no “sandwich generation credit,” but the following are some tax benefits Barb and others who find themselves taking care of extended family could be eligible to claim for tax year 2017.
Child tax credit
The maximum child tax credit is $1,000 (based on income and filing status) for each qualifying child under 17 for tax year 2017. Starting in tax year 2018, the new child tax credit will be worth up to $2,000 due to the enactment of the Tax Cuts and Jobs Act. Families with dependents over the age of 16 may also qualify for a new family tax credit of $500 per dependent who does not qualify for the child tax credit.
Child and dependent care tax credit
Based on income, the child and dependent care tax credit can be claimed for up to 35 percent of qualifying expenses for in-home caregivers, day care facilities and some day camps. The maximum amount of qualifying expenses that may be considered for the credit is $3,000 for one child and $6,000 for two or more children.
For a parent to qualify for the credit the child must be 12 or younger and the caregiver cannot be the parent or stepparent, or someone the parent claims as a dependent. Generally, eligible parents are those who need a caregiver because they are working or looking for work, but some parents who are full-time students are eligible. Other qualifications apply when claiming the credit for care provided for adults.
The credit is also available for the taxpayer’s own parents if they can be claimed as dependents and require care or supervision – such as senior day care for an individual with dementia – while the taxpayer works.
Exemptions for dependents
A taxpayer is allowed a tax exemption for each person they can claim as a dependent. A dependent can be either a qualifying child or a qualifying relative, such as an elderly parent. Each exemption that the taxpayer claims is a $4,050 reduction to taxable income for tax year 2017. Starting with tax year 2018, this exemption will not be available because of the Tax Cuts and Jobs Act. However, the same eligibility tests to be a “qualifying child” or “qualifying relative” will apply to claim other dependent-related tax benefits.
Who qualifies as a dependent?
A qualifying child doesn’t have to be the taxpayer’s biological child. The child also could be a stepchild, adopted child, eligible foster child, sibling, stepsibling or a descendant of one of these; in many families, there’s no “mine” or “yours,” only “ours.” In addition to the relationship test, qualifying children generally must:
- Be under age 19 or under age 24 and a full-time student, and younger than the taxpayer or the taxpayer’s spouse if filing jointly, or any age if permanently and totally disabled
- Live with the taxpayer for more than half the year (exceptions apply for birth, death and temporary absences)
- Not file a joint tax return for the year, unless the return was filed only to claim a refund of taxes withheld, and neither spouse would have a tax liability if separate returns were filed
- Be a U.S. citizen, U.S. national, or resident of the U.S., Canada or Mexico
- Not provide more than 50 percent of their own support for the year.
Taxpayers may be able to claim a dependent exemption for qualifying relatives they support, such as their parents and grown children. A qualifying relative can be any age, but must meet the following tests:
- Must not be the qualifying child of the taxpayer or of any other taxpayer
- Must either live with the taxpayer all year or be the taxpayer’s child (includes biological and adopted children, plus descendants of either), foster child, stepchild, sibling, step-sibling, or half sibling, parent, grandparent, father- or mother-in-law, stepparent, aunt or uncle, niece or nephew, brother- or sister-in-law, or son- or daughter-in-law
- Must have gross income for the year less than $4,050
- The taxpayer must provide more than 50 percent of the individual’s support (eligible expenses when calculating support provided include food, lodging, clothing, education, medical and dental care, recreation and transportation)
- The individual must meet the same U.S. citizenship/residency tests and joint return tests that apply to a qualifying child.
Even with the elimination of personal exemptions, some families will benefit from the standard deduction being doubled to $24,000 for a married couple filing jointly ($12,000 for taxpayers filing under single status) due to the Tax Cuts and Jobs Act. The higher standard deduction could make itemizing deductions a thing of the past for some taxpayers.
At a time when many people thought they would be empty nesters, sandwich generation caregivers are seeing their expenses and responsibilities increase. Depending on their specific situation, members of the sandwich generation and others might be eligible for some tax relief. For more information about tax deductions, contact a local H&R Block tax professional. To find the nearest H&R Block tax office, visit www.hrblock.com or call 800-HRBLOCK.
Deciding who claims a child on taxes if not married, or if a married couple chooses to file separately, can be complicated.
With the child tax credit for 2018 doubling, the tax benefit of motherhood for some could be twice as nice.