If you are raising your grandchildren on your own, chances are you're busy enough without having to worry about taxes. Alas, as one of the two certainties in life, you'll have to start thinking about them come tax time, which may seem daunting if there have been changes in your family since last year. But don't worry, while there are costs to raising children, there are financial benefits as well, which you may remember from raising your own kids!
The IRS will give you money back just for having a child living in your home. There are three federal tax credit programs that give extra money to people who are raising children: the Earned Income Tax Credit (EITC), the Child Tax Credit and the Child and Dependant Care Credit. Tax credits are better than tax deductions because you can subtract a tax credit from any federal income tax that you owe, while a deduction only reduces the income that you use to figure out the taxes you owe. Basically, a credit keeps more money in your pocket.
There are age limits for the children you claim when you take any tax credit. If your grandchildren are full-time students, you can claim them as dependents until they turn 24. If not, you can only claim them until they turn 19. If any of your grandchildren have a disability, they can qualify at any age.
The EITC is for low-income families. It is not necessary to be raising a child in order to qualify for this program, but people who are can get a bigger tax break. There are restrictions, however, as to how much money you can make in order to qualify for the EITC. If you qualify for the EITC and you have at least one child at home, you can receive advance payments in your paycheck, which could be very helpful. All you have to do is fill out a W-5 form at work. To learn more about the qualifications for this credit, see IRS publication 596.
If your income is too high to qualify for the EITC, you may still be eligible to receive the Child Tax Credit, but don't plan on getting any money back if you don't owe any taxes. Your grandchildren must be under the age of 17 and they must be claimed as dependents on your federal income tax return to qualify for the Child Tax Credit. Until 2008, you will be able to take a $700 tax credit for each child who qualifies. In addition, if you are raising three or more grandchildren, you may be able to get the Additional Child Tax Credit, which would give you an even greater tax break.
The third tax program that may be able to assist you is the Child and Dependent Care Credit. This tax credit helps families pay for childcare so the guardian can work or look for work. You will not receive a refund if your credit is greater than the taxes you owe, but the amount of your credit will depend on the number of children you are raising, your income and how much you pay for childcare. Your grandchildren must also be under the age of 13 or have a disability to qualify for the Child and Dependent Care Credit.
Some states offer their own earned income tax credit, as well as a child and dependent care credit. To find out if your state has a program, call your state department of revenue.