Raising Grandchildren Gives Rise to Financial Challenges

by Monica Steinisch

Introduction

For a variety of reasons, increasing numbers of grandparents are raising their grandchildren. This new role as primary caregiver to their children's children may be temporary or permanent, welcome or obligatory, but it is almost always financially challenging.

In an informal online survey conducted at RaisingYourGrandchildren.com, 63.8% of respondents cited finances as their top concern regarding raising their grandchildren. Even those grandparents who would describe their financial situation as secure are likely to feel the pinch when they have to buy car seats and school clothes again. Understanding what assistance may be available to your grandfamily will help you make ends meet and avoid completely derailing your retirement plan.

Grandparents' income, expenses may change

When Karen Best Wright, the woman behind RaisingYourGrandchildren.com, says that becoming a custodial grandparent can wreak havoc with your finances, she speaks from experience. Over the course of nearly seven years parenting her three young grandchildren, her husband took an early withdrawal from his retirement plan to pay for legal fees, she dropped from full-time to part-time work and stopped contributing to her own retirement plan, and the couple took on debt to create more living space for the kids. Wright says there are some things she'd advise others to do differently.

First, she says, try to stay within your means as much as possible. For example, before remodeling or moving, try to use existing space in your home to accommodate the kids, particularly if you're not sure how long they'll be living with you.

That's a good goal, but may not always be possible, says Madelyn Gordon, executive director of Grandparents as Parents, a Los Angeles-based service and support organization for grandparents and other relative caregivers. You'll have more leeway to improvise in an informal situation, where the state is not involved. Government programs, such as foster care, may insist on separate bedrooms for boys and girls, specific furnishings, or other conditions.

If your situation is likely to generate legal fees, Wright says you can curb costs by using free or low-cost legal aid services. "If you're not fighting [your kids or the government], you may be able to get legal custody without using a lawyer at all, or just hiring one to review the forms you fill out." To find out if you qualify for free or low-cost legal help, contact the legal aid program in your area.

Curbing legal fees is worth the extra effort since these costs alone can decimate your retirement plan, or worse. Wright recalls one grandmother who spent close to $30,000 from her retirement plan to pay for an attorney, and another who lost her home over debt for legal fees.

Child care is another expense that can be overwhelming. Wright's circumstances qualified her for state-paid child care—it would have cost her $1,200 a month if she'd had to pay out of her own pocket—but she hears from a lot of grandparents who have had to quit working because they couldn't afford daycare. Unemployment affects not only current income, but retirement income as well, since contributions to Social Security and a company retirement plan cease. If you need child care but can't afford it, make applying for free or subsidized services your top priority. Your local Child Care Resource and Referral service is a good place to start.

The bottom line for caregiver grandparents:

• Avoid taking on new, large debts in your 50s or later;
• Don't willingly sacrifice your retirement savings plan; and
• Accept assistance if it's available.

Financial aid for grandfamilies

"Certainly, there are some grandparents whose financial situation is such that they would not have to alter their plans or practices if their grandchild or grandchildren came to live with them," says Wright. But for most grandparents, she says, raising grandchildren is a major financial event that can impoverish those who don't seek help.

Assistance can come in many forms. Grants, child care, food stamps, and tax breaks are a few of the ways government and private programs help custodial grandparents make ends meet. Exactly what you will qualify for depends mainly on the form of your custody arrangement, your income and assets, and the state where you live.

Here are some benefits available to eligible grandparents or grandchildren:

• Temporary Assistance for Needy Families (TANF)—Benefits vary from state to state and may come in the form of cash, paid child care, a clothing allowance, and more. If household income is too high, a grandparent can apply for a child-only TANF grant, which considers only the child's income (for example, from Social Security if the child's parent is deceased). TANF recipients may qualify for other benefits such as Medicaid and food stamps. Learn more about your state's program by visiting the Administration for Children & Families online.

• Medicaid—This state-administered program provides health care for eligible low-income individuals and families not covered under a private plan. If a child lives with a nonparent family member, that caregiver can apply for Medicaid on his or her behalf. Learn more by visiting the Centers for Medicare & Medicaid Services online.

• Children's Health Insurance Program (CHIP)—Available in every state, CHIP provides low-cost health insurance coverage for children in families that earn too much to qualify for Medicaid but can't afford private health insurance. The program covers many things, from checkups and immunizations to X-rays and hospital care. To learn more or to apply, call 877-543-7669 or visit InsureKidsNow.gov.

• Social Security benefits—Your grandchild may be eligible for benefits if one of his or her working parents has retired, become disabled, or died. Under certain circumstances, your grandchild may be eligible for benefits when a caregiving grandparent retires, becomes disabled, or dies. Learn more by visiting the Social Security Web site.

• Supplemental Security Income (SSI)—SSI is a monthly Social Security benefit for those who are disabled. In most states, children who get SSI benefits also can get Medicaid. Learn more at the Social Security Web site.

• Subsidized guardianship—Most states have subsidized guardianship programs that provide financial aid to relatives who provide a permanent home for children whose parents are not able to do so. Learn more at the American Bar Association Web site.

• Kinship foster care—This state program pays subsidies to relatives who take care of a child who has been removed from his or her parent(s); the state retains legal custody. Custodial relatives must meet the same requirements as other foster parents. Learn more about your state's foster care program by visiting the Administration for Children & Families online.

Reduce tax liability

Taking in your grandchildren carries with it financial and tax consequences, points out Margaret Atkins Munro, a Vermont-based enrolled agent and author of "Taxes 2009 for Dummies" and "529 & Other College Savings Plans for Dummies."

"Of course, you don't make decisions based solely on the tax consequences," she adds. "But you should know what they are...knowledge is so empowering."

To claim these tax benefits, you will have to qualify under Internal Revenue Service (IRS) rules. That generally means that you and the children meet the definitions of a primary caregiver and a dependent, neither your income nor the children's exceeds the limits, and no one else claims the child as a dependent.

• Child Tax Credit—Grandparents who meet income guidelines may be eligible for a tax credit of up to $1,000 for each child younger than age 17. Lower-income or larger families may qualify for an additional child tax credit that puts money in their pockets even if they did not pay any tax. Learn more in IRS Publication 972, "Child Tax Credit."

• Dependent exemption—Grandparents who meet income guidelines can exempt up to $3,650 of income for each qualifying child younger than age 19. The actual amount of your savings depends on your tax bracket. Learn more in IRS Publication 501, "Exemptions, Standard Deduction, and Filing Information."

• Earned Income Credit (EIC)—The EIC benefits low- to moderate-income workers. When the credit exceeds the amount of taxes owed, it results in a refund. To qualify, taxpayers must file a tax return even if they owe no taxes. Learn more in IRS Publication 596, "Earned Income Credit (EIC)."

• Child and Dependent Care Credit—If you're working or looking for work and you paid for child care for a child age 12 or younger, you may qualify for this credit. It's income-dependent, but it doesn't completely disappear with higher incomes. Learn more in IRS Publication 503, "Child and Dependent Care Expenses."

• Change in filing status—If you are a single grandparent, you may be able to file as Head of Household or as Qualifying Widow(er) with Dependent Child (this status is available only for the two years following the year your spouse died). Both of these filing statuses entitle you to a higher standard deduction and lower tax rates than filing as Single or Married. Learn more in IRS Publication 501, "Exemptions, Standard Deduction, and Filing Information."
  About 64% of grandparents cited finances as their top concern regarding raising their grandchildren.

• Tax breaks for education—For those who meet income guidelines, the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit provide tax breaks for postsecondary education. You may be able to take a tuition and fees deduction instead if it will result in a lower tax liability. Learn more about education-related tax breaks in IRS Publication 970, "Tax Benefits for Education."

Whatever you do, don't derail your retirement plan to pay for a child's education.

"If resources are limited, fund your retirement first," advises Munro. Kids can get financial aid, student loans, scholarships, and part-time work—retirees don't have those options.

Keeping sight of your own long-term financial needs is good advice for anyone whose path may suddenly change. It's especially crucial for those with limited working years left to pay off debt and accumulate an adequate nest egg, or retirees who aren't in a position to replace assets they tap. And taking steps to reduce money-related stress will allow you to savor your new role as caregiver, even if raising a second family was never part of your original retirement plan.

Published September 13, 2010

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