By Lee Sherman
As the coronavirus pandemic continues to wreak havoc on US families, many parents are finding that kids who have left the nest are headed back. A record number of adult children are returning home. These boomerang kids, as they’ve come to be called, may have lost jobs due to COVID, or are unable to find a job in one of the toughest job markets in years. Or perhaps they never left, deciding to wait for a time when they can return to in-person learning or shared housing. If you’ve got young adults sheltering in place with you, you may be wondering how a not so empty nest will impact your taxes.
Having adult children at home can change your tax calculus. Claiming an extra dependent is the most obvious way to cut your tax bill. But the tax code has changed dramatically in recent years.
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 and made sweeping changes as to who can be considered a dependent and what sort of deductions you’ll be able to claim. The new rules are complicated and are best discussed with a tax attorney or financial advisor. The main thing to know about the new law is that personal exemptions have been eliminated. That means you may no longer be able to claim your adult children as dependents.
You may be supporting your adult child financially, but that doesn’t necessarily mean you can claim them as a dependent. The TCJA removed the $4,050 personal exemption that you were allowed to claim for yourself and your dependents. However, it is still possible to claim what’s commonly referred to as the “family tax credit” for other dependents.
Whether or not your adult child qualifies as a dependent is determined by the following:
- They must have been living with you for six months or more
- They must be under age 19 or a full-time student under age 24
- Their total taxable gross income from all jobs must be less than the personal exemption amount of the year you’re claiming them in.
- You must be paying for over half of their support.
Note that if you list them as a dependent, your adult child won’t be able to file a joint return with a spouse. They also can’t be filed as a dependent by you and someone else (such as their in-laws) at the same time.
Another thing to be aware of but not really a cause for concern is the “gift tax” rule. As far as the government is concerned, there’s no problem with supplying your boomerang kid with room and board. But if you transfer a valuable asset (let’s say a car) worth more than $15,000, while you won’t have to pay taxes on it, you will have to report it. For most taxpayers, the “gift tax” won’t have any impact on their finances. You are allowed to give up to $11.58 million worth of gifts in your lifetime before you are taxed on them.
Whether your kid’s return to the nest is temporary or indefinite, it’s best to discuss the implications and sort out any shared responsibility for expenses ahead of time.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.