Helping Adult Children Financially: Part 4 - Childcare

Author Lois Wyse wryly observed, “If I had known how wonderful it would be to have grandchildren, I'd have had them first.” Many grandparents share this sentiment to the extent that even those reluctant to assist their adult children financially in other areas are much more willing to help out when it comes to grandchildren. That’s fortunate because post-Boomer generation parents face significant costs in the childcare arena.

As noted in 5 Reasons Your Adult Children May Need Help Financially of this eBook, a family in 2022 with two children in a daycare center (an infant and a 4-year-old) paid an annual average of well over $20,000.

At the same time, childcare providers are dealing with the September 30, 2023 expiration of $24 billion in federal COVID-19 funding that supported many centers during the pandemic. As many as 70,000 childcare programs are projected to close, affecting 3.2 million children. For those centers remaining open, many have been forced to increase their monthly fees.

These trends provide a perfect reason for grandparents to help their adult children bear the varied costs of child-rearing. There are several ways they can pitch in:

• Direct childcare
• Paying daycare provider costs or other costs
• Serving as a full-time caregiver to grandchildren

Direct Childcare

According to a 2018 AARP survey, 38% of grandparent respondents said they provide some level of babysitting or daycare for their grandchildren. There are several reasons why this can be a favorable arrangement for parents, grandparents, and grandchildren.

Lower Cost – Grandparents often care for grandkids at no or low cost.

Trusted Caregivers – Unlike delegating child care to non-family professionals, grandparents are well-known by both parents and children. (Of course, that might also be a reason NOT to let grandparents babysit if they’re known to be unreliable.)

Flexibility – Grandparents may be more likely to cover hours and days when professional caregivers are not available.

Despite these advantages, it’s wise for grandparents and their adult children to agree ahead of time on ground rules. Both parties need to agree on basics like:

• A method for arranging times and dates for grandparent caregiving that works for both parties
• Amount of pay, if any
• Times for drop off and pick up
• Schedule during caregiving - Times for meals, play, media (TV/computer), sleep, and any special events like doctor visits
• Meals and snacks – What food and who provides it?
• Safety and health – Is the caretaking environment “child-safe”? Also, who are the emergency contacts, and under what circumstances should they be contacted?

Another essential conversation centers on behavior management. Different parenting philosophies may lead to conflict if not discussed at the outset. Both grandparents and their adult children need to be as flexible as possible in the quest for an agreement that focuses on the grandchild’s best interests.

Finally, it’s prudent to agree at the beginning that the arrangement will evolve over time and that, at some point, childcare provided by grandparents will no longer be needed. Setting such expectations early on could help preserve good family relations over the long run.

Paying for Daycare

Some grandparents could be willing to babysit their grandchildren, but they may live too far away for this to be an option. Another way to help would be to help pay non-educational daycare expenses. (Paying qualified educational expenses for preschool and beyond is covered in Helping Adult Children Financially: Part 2 - Education Expenses).

However, grandparents need to know this would be a gift under IRS rules because the costs are unrelated. As noted in Helping Adult Children Financially: Part 1 - The Basics, an individual grandparent can annually gift up to $17,000, and a couple filing jointly can gift up to $34,000 without reporting the money to the IRS under the gift tax rules. Even if the annual gift amount exceeds these thresholds, the individual lifetime limit is $12.92 million before a gift tax is imposed, so most people will never pay it.

If paying daycare expenses doesn’t work for some reason, grandparents can help financially in other areas. This assistance can free up funds so adult children can cover childcare costs independently. One area excluded from gift tax reporting requirements is medical expenses, including medical insurance payments. However, the gift money for grandkids' health insurance must be paid directly to the healthcare provider or insurance company for the exclusion to apply.

Grandparents as Full-Time Caregivers

In some circumstances, grandparents make a huge commitment as full-time caregivers to grandchildren. According to the U.S. Census Bureau, around 2.3 million grandparents live with and are fully responsible for their grandchildren. This is a big personal and financial responsibility. Luckily, these parents, parenting for a second time, can take advantage of some tax breaks.

Head of the Household Filing Status

An unmarried grandparent may qualify for head of household tax filing status. Eligibility requires that the taxpayer provides a home for a dependent grandchild under 19 for over half the year. (This can be extended to 24 years old for a full-time student.)

Earned Income Credit

A working grandparent with a dependent grandchild living in the household is eligible for the earned income tax credit if adjusted gross income falls below a specified threshold and meets other requirements.

Child Tax Credit

A grandparent providing full-time care for a grandchild may be able to claim a $2,000 child tax credit. Under certain circumstances, up to $1,400 of the credit may be refundable.

Credit for Childcare Expenses

A grandparent may be able to claim tax credits up to $6,000 for child and dependent expenses, assuming grandchildren are fully dependent and under 13 years old.

Education Credits

For grandparents paying educational expenses, tax credits can be claimed for higher education expenses at accredited institutions for dependent grandchildren. For example, the American Opportunity Tax Credit (AOTC) can provide a tax credit of up to $2,500. Unfortunately, higher-income taxpayers may not be eligible.

Deduction for interest on qualified education loans

Grandparents funding a dependent grandkid’s higher education with a qualified student loan may be able to claim a deduction for up to $2,500 of interest paid. This tax break also is not available to high-income taxpayers.

Medical and Dental Expenses

A taxpayer who itemizes can deduct some unreimbursed medical and dental expenses paid for a dependent grandchild. The deduction takes effect if the combination of the grandchild’s medical costs and the grandparent’s medical deductions total exceeds 7.5% of the taxpayer’s adjusted gross income.

There are many ways grandparents can help their adult children by helping grandchildren. In each case, it makes sense not only to assess the financial implications but also the potential impact such help will have on relationships in the family over the long run.