Can 'Boomerang Kids' Help With Their Parents' Taxes?
About 43% of men and 36% of women ages 18 to 34 still live with parents or relatives, according to the Pew Research Center, but experts say there are a few things parents can do at tax time to help offset the costs of letting those adult children stay in the nest. As with parenting, though, it can be a tricky endeavor.
Claim Junior as a dependent
In general, if your child isn’t making more than $4,000 per year and you’re providing more than 50% of his or her support, then he or she may still qualify as a dependent, says Jim Guarino, a CPA and certified financial planner at Moody, Famiglietti & Andronico in Tewksbury, Massachusetts. For the 2015 tax year, that can net parents a $4,000 exemption.
There are a few catches, adds David Haas, a certified financial planner at Cereus Financial Advisors in Franklin Lakes, New Jersey. First, you’ll have to be able to prove you’re paying more than half of the child’s expenses. Second, if your child is 24 or older, has a job and isn’t disabled, you probably can’t take the exemption.
“The tax laws don’t make it easy,” he says.
Make her a tenant
It’s possible to turn that basement or bedroom into a rental and have your child pay to live there, which could make a portion of your utilities and other costs deductible. You may even be able to deduct some depreciation on the house, experts say, but the strategy also has a few caveats.
“In theory, it’s an absolutely great idea. The problem is, in order to be a landlord you really need to keep track of expenses,” Guarino cautions.
You’ll also need to report the rental income, and those depreciation deductions could come back to haunt you when you sell your house.
“Whatever you have written off as a percentage value of the house over a number of years has to then be added back in as taxable income when you go to sell the house,” says Guy Baker, managing director at advisory firm Wealth Teams Solutions in Irvine, California.
“If they never sell the house, it’s really a moot point,” Guarino notes, but the extra tax-prep time and costs could outweigh the savings, he says.
Hire your adult child
If you’re self-employed, it might be worth putting an adult child on the payroll if you’re supporting him or her anyway. The money you pay could then become a business expense instead of taxable income to you, and it shifts that money into the child’s tax bracket, which is probably lower, says David Demming, a certified financial planner at Demming Financial Services Corp. in Aurora, Ohio. Plus, he or she will have a job to do, though that may mean you can’t claim the child as a dependent.
“If you’re subsidizing your child anyway, it’s a way for the self-employed business owner to essentially deduct it,” Haas adds.
Capitalize on your health coverage
Flexible spending accounts allow workers to use pre-tax money to pay for prescriptions, copays, eyeglasses and other expenses. You may be able to use that tax-advantaged money to help cover your child’s health-related costs if he or she is still on your policy and your employer offers an FSA. Note, however, that the IRS limits how much you can put in an FSA each year. (The limit is $2,550 in 2016.)
Also, if you’re self-employed, aren’t eligible for a spouse’s employer coverage and you buy your own health insurance, it may be worth putting your child on your policy because the premium is usually deductible, Haas says. Remind adult children that staying on your policy can be a bargaining chip for negotiating higher pay from an employer by offering to stay off the company health plan, Guarino says.
And, he notes, you can remind them that moving expenses can be tax-deductible, too.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email:email@example.com.
This article was written by NerdWallet and was originally published by USA Today.
This article originally appeared on NerdWallet.