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Recently-released IRS Publication 4694 highlights various tax breaks that may be available to an individual who is raising a grandchild. These include head of household filing status, exemption for the child, earned income credit (EIC), child tax credit (CTC), credit for child and dependent care expenses, credits or deductions for qualified education expense, and deductions for medical and dental expenses.

Head of household filing status. An individual who is considered unmarried and has a qualifying child may be eligible to use head of household as his or her filing status. It generally is more favorable than the single filing status.
An unmarried taxpayer may qualify as a head of household by maintaining as his home a household that is the principal place of abode for more than half the year of a qualifying child of the taxpayer. However, the taxpayer won’t qualify as a head of household if the qualifying child is married at the close of the taxpayer’s tax year and isn’t a dependent of the taxpayer because he filed a joint return, or because he isn’t a U.S. citizen or resident, or both.
A “qualifying child” is an individual who: (1) bears a specified relationship to the taxpayer including being a grandchild of the taxpayer; (2) has the same principal place of abode as the taxpayer for more than one-half of that tax year; (3) hasn’t reached 19 as of the close of the calendar year or is a student who hasn’t reached 24 as of the close of that calendar year; and (4) hasn’t provided over one-half of his or her own support for the calendar year in which the taxpayer’s tax year begins.

Exemption for the child. A grandparent who has a child living with them may be able to claim the child as a dependent and, if so, may qualify for other tax breaks.
A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.” A person generally qualifies as the taxpayer’s dependent if the person is the taxpayer’s qualifying child or qualifying relative.

Earned income credit. A grandparent who is working and has a qualifying child living with him or her may be able to take the EIC, even if the grandparent is 65 years of age or older. This could generate a refund even if the grandparent owes little or no tax.
An eligible individual is allowed an EIC equal to the credit percentage of earned income for the tax year.

Child tax credit. A grandparent who is raising a grandchild may be able to take the CTC and, under specific circumstances, the additional CTC. The latter may provide a refund even if no federal income taxes are owed.
For 2010, individuals may claim a maximum $1,000 CTC for each qualifying child the taxpayer can claim as a dependent. The child must be under 17 and a U.S. citizen or resident alien.
The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified AGI (AGI increased by excluded foreign, possession, and Puerto Rico income) above: $110,000 for joint filers; $75,000 for unmarried individuals; and $55,000 for marrieds filing separately.
The CTC is refundable, but only to the extent of the greater of: (1) 15% of taxable earned income above $3,000 for 2010; or (2) for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year. IRS calls the amount of the CTC that’s refundable the “additional child tax credit.”

Credit for child and dependent care expenses. This credit may be available if a grandparent pays someone to care for a qualifying individual, i.e., a dependent under age 13, or his or her spouse or a dependent who is physically or mentally not able to care for himself or herself, while the grandparent works or looks for work.
The credit for 2010 is 35% of employment-related expenses for taxpayers with AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. The maximum amount of employment-related expenses that may be used to compute the credit for 2010 is $3,000 for one qualifying individual, or $6,000 for two or more qualifying individuals.

Qualified education expense. There are several tax breaks that may be available to a grandparent who pays his or her grandchild’s education costs. Contact us for more information.

Medical and dental expenses. An individual who itemizes can deduct the amount by which certain unreimbursed medical and dental expenses paid during the year for himself or herself, his or her spouse, and his or her dependents exceed 7.5% of his adjusted gross income.

If your living situation has changed, contact us! We’ll help you figure out which tax breaks you qualify for during the 2010 tax year.