All In The Family -- How A Multigenerational Household Affects Your Taxes
More and more Americans are finding themselves living in a home with multiple generations. Whether you are going to share your home with adult children, aging parents or small grandchildren, it's important to know how to properly handle the tax changes this brings. Here are a few tips for any multigenerational household.
The first tax question that multigenerational households generally must answer is who claims whom on their taxes. The answer to this question can vary widely depending on the age and relationship of the dependent as well as how much income they earn. You can find help at the IRS' website.
If Grandma doesn't have much income coming in and you're providing her home, you are likely able to claim her on your taxes – decreasing your taxes significantly. The same may be true for adult children who aren't working much. Minor children generally should be claimed by their parent, but even for this there are exceptions.
It's best to discuss the issue of claiming dependencies well before everyone begins filing their taxes. Otherwise, you may find yourself amending returns, having needless conflicts or losing out on some tax benefits.
Tax credits related to dependency – including the personal exemption, education credits, student loan interest deductions and child care credits -- generally go to those claiming the dependent.
Similarly, tax credits related to the house – such as mortgage interest and tax deductions – should be claimed by those who are legally responsible for the payments. If you contribute to the expenses but are not legally liable for the house payment, for example, you wouldn't qualify for the credit.
Contributing to the costs of the house can be a tricky tax situation, so you should probably discuss it with your accountant or tax preparer early on. If the home owner charges rent to persons living in their home, they may be expected to declare this as passive income on their tax returns. Expenses can be deducted from this income, but it may call for additional tax forms when filing. Gifts made between family members voluntarily, however, are generally not declared as income as long as they fall below the gift tax threshold ($14,000 annually per donee in 2016).
Because of passive income reporting requirements, the homeowner may want to come up with alternative contributions that some family members can make.
If you're unsure about the affect that creating a multigenerational home will have on your taxes, talk with a qualified accountant or tax specialist from a company like Tax Specialists Of Northern Colorado LLC before making the decision. Setting up the arrangement in the correct way will help you save money and make your taxes easier and less stressful.