Tax Tips

Tax Breaks for Boomerang Kids

Claiming an adult child as a dependent -- or deducting his or her health expenses -- can cut your tax bill.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

February 22, 2011

The economy is slowly rebounding, but many families continue to struggle. In some cases, parents are providing financial help to adult children who can’t find employment in this tough job market.

If your empty nest got a little more crowded last year, your tax situation may change, too. Say your son couldn’t find a job after graduating from college last spring and he moved back home. Or your daughter and grandchild moved in with you after your daughter’s divorce.

Who qualifies as your dependent, allowing you to deduct an additional $3,650 exemption on your 2010 tax return? (Each exemption reduces your taxable income by that amount.)

It depends on the boomerang child’s age, income, how long he lived with you during the year (or in some cases, didn’t live with you) and whether you provided more than half of his financial support. Dependents can be classified as a qualifying child or a qualifying relative.

For example, if your recent college grad was under 24 at the end of last year and earned less than $3,650, he is a qualifying child and you can claim an exemption for him. But if he files his own tax return, he can’t claim an exemption for himself.

Your boomerang daughter could be a qualifying relative if she earned less than $3,650 in 2010 and you provided more than half of her support. Or even if your daughter made too much to qualify as your dependent, you could claim your grandchild as your dependent -- as long as your daughter agrees not to claim the child as her dependent. If you’re in a higher tax bracket than your daughter, claiming your grandchild as your dependent will save the family money. For more information on who can be claimed as a dependent, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

New health cost write-offs

The health care reform law passed last year allows parents to take deductions for medical expenses they paid for children under age 27. Previously, the child had to be under age 19 or a full-time student under age 24. Don’t confuse this new tax break with a separate new provision in the Patient Protection Act that requires health insurers to allow children under age 26 to be covered on a parent’s policy.

For tax purposes, it does not matter whether your child is covered under your health insurance plan or is even considered a dependent. “If the child is under age 27 and incurs a medical expense that the parent pays, the parent can claim the deduction on their taxes, whether the child is a dependent or not,” says Mark Luscombe, principal federal tax analyst for CCH, a provider of tax software and information.

The parent must itemize to claim a tax deduction for medical expenses. And only those medical expenses that exceed 7.5% of adjusted gross income are deductible.

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