The tax law does not contain any tax rules specifically for grandparents. However, there are a number of breaks that grandparents can avail themselves of to reduce their tax bills while helping their families.
Gifts to family members
There are no federal income tax deductions for giving money or property to grandchildren. However, such gifts may be free from federal gift taxes; in any event, gifts reduce the size of your estate, which may minimize or avoid any estate taxes. Here are some ways to make gifts that help grandchildren:
A grandparent may be in a financial position to lend money to a grandchild—to buy a home, start a business, or for any other purpose. Usually, if there is no interest charged, or the interest is below the applicable federal rate for the term of the loan, the lender must report “imputed” interest even though no funds are received. However, there is no imputed income if either of these two conditions exists:
Important: Be sure to put any loan in writing and include important loan terms (e.g., interest rate if any, repayment schedule, what happens in default). This will allow you to write off the loan if the grandchild fails to repay it. Without a valid promissory note, the IRS may claim you merely made a gift of the money, which is not deductible.
Today, many grandparents are unpaid day care workers, and they love it! If a grandparent is paid for babysitting so the parent can work, the parent can claim a dependent care credit for the wages as long as the grandparent is not the parent’s dependent. The grandparent must report the income.
Being a grandparent is a joy in itself. Tax benefits for you and your family are icing on the cake.