The Millennial generation is moving back home in record numbers, and their parents are getting some sympathy from, of all people, the IRS.
The much-despised agency has a soft spot in its tax code for parents whose nests are no longer empty.
More than one-third of Millennials (ages 18 to 33) have come home to roost, rather than striking out on their own in the adult world. A Pew Center Research survey put the number at 21.6 million for 2012, and it’s trending up.
That is 3.1 million more adult children living at home since 2007. The struggling economy, as is the case for so many of America’s problems, is to blame. College graduates can’t find a job when they leave school, and paying back student loans is an issue for 70 percent of them. There also is a significant pool of young workers who either get laid off or fired and don’t have anywhere to turn.
So they knock on mom and dad’s door and ask if they can get their old room back, meals and use of the electric and water. And maybe some gas for their car and a few bucks for clothes and, well, pretty much everything they used to get when they were kids.
IRS Cuts Parents Some Slack
The IRS has compassion for that unenviable situation. They dole it out in the form of deductions and credits that can reduce a parent’s tax bill, sometimes considerably. Unfortunately, there is also a healthy dose of qualifications that your child must meet in order for you to receive the deductions and credits. After all, if this were simple, the IRS wouldn’t get involved.
For example, if your adult child was under 24, attended college in 2013, and came home because you would provide more than 50 percent of support for their expenses, then you can deduct $3,900 off your taxable income.
That’s a lot of ifs to overcome, but it’s probably an accurate description of what’s going on in many homes. Junior’s got a degree, but not a job, and you’re footing the bill while he worries about his next job interview.
Depending on what tax bracket the parents fall in, that could mean a savings anywhere from $585 to $1,287 less on your 2013 tax bill.
Passing the Qualifying Tests
That’s the good news. The bad news is that there are approximately 50 hypothetical situations for almost every break the IRS allows with your income tax.
They all start with making sure your child is either a qualifying dependent or qualifying relative, as defined in the IRS tax code.
A qualifying dependent must meet the IRS rules for age, relationship, support, residency and not be filing a joint return with a spouse. That means it’s possible you could deduct your child, even if he or she has married.
A qualifying relative must meet similar tests for relationship and support, but also not make more than $3,900 for the year. It is important to note that your child can’t qualify in both categories. In other words, you can’t deduct them as a qualifying dependent and a qualifying relative. It’s one or the other.
Credits, Deductions Have Definite Impact
If your child does pass the test for either qualifying dependent or qualifying relative, there are some nice credits and deductions available. Here are a few worth checking out:
- American Opportunity Credit: This reduces your taxes by as much as $2,500 for tuition, books, supplies and necessary equipment the first four years your child attends college, as long as they are pursuing a degree.
- Lifetime Learning Credit. You don’t have to be pursuing a degree for this credit, which can be as much as $2,000. Anyone who takes a course at a higher education institution can claim it as long as they make less than $63,000 on an individual return and $127,000 on a joint return.
- If you make too much for the Lifetime Learning Credit, you can deduct up to $4,000 off your taxable income for paying their tuition and fees.
- Child and Dependent Care Tax Credit.
There are plenty of nuances with each category, so it’s wise to read through the IRS explanation or consult an expert before making deductions. J. Alden Baker, a CPA who specializes in tax returns, offers this advice:
“There is a lot of ‘If this, then that’ in tax law. There are strings attached to almost everything, so you have to be careful before claiming your adult child as a dependent.”
Be careful. The IRS doesn’t give many people breaks, so if this works, take advantage of it.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].