Part One: The Parent-Adult Child Relationship
The Sandwich Generation: A term that wasn't widely known in the early 1990's, has become a growing part of our society. This term is used to describe more than 20 million people who care for their parents, while also supporting their own children. According to the Pew Research Center, more than one in eight Americans, who are 40-60 years of age are caring for a parent and raising a child. With the population of those 65 years or older expected to double to 70 million by the year 2030, an increase of those in the Sandwich Generation is likely to happen rapidly.
The internet has many articles on the Sandwich Generation. You may even be surprised to learn that July is designated as Sandwich Generation Month. But, as you read through the majority of the articles, you will discover they deal mainly with the social, family and caretaker aspects of being caught in this family sandwich. What is lacking is advice on how to approach the financial, wealth and taxation issues that are the unavoidable consequences, or, if properly planned, benefits that can be created from a potentially troublesome family situation.
The current economic climate has made jobs for recent graduates difficult to find, and, even if a young adult child has a job, they are likely to be the first to go in a layoff situation. If an adult child returns home or needs financial assistance, history shows the parent will respond to the family situation at a financial cost. However, with a little knowledge and some planning, there may be a better situation to consider.
We've provide three scenarios and some questions that may be of interest to those currently in the family sandwich, or those that recognize they could be the next member of the Sandwich Generation. A panel of Eide Bailly professionals offers the following discussion:
An adult child is a new college graduate and cannot find a job, so they move back to mom and dad's.
If I make a payment to my child's legal obligations, am I making a taxable gift to the child?
In most cases, payments of your adult child's legal obligations, such as vehicle, credit card, medical or student loan debt, are considered to be taxable gifts if the payments, along with other gifts, total more than the currently available $13,000 annual gift exclusion, each for mom and dad for a total of $26,000. Then, mom and dad's lifetime gift allowance could be used to offset any excess current taxable gifts.
Is there anything I can do in regard to health insurance coverage?
Under the Affordable Care Act, insurance companies are required to allow young adults under age 26 to stay on their parent's family policy, or be added to it. Some insurance policies extend this benefit to young adults under age 27. If your child should have a large medical emergency, it could devastate them financially. Taking advantage of this option for your child could be critical to keeping health insurance coverage for them at a time when they can least afford to be without.
What issues should my adult child and I consider before I decide to begin making payments on their student loans?
You and your child should research their repayment options to determine the best course of action: which repayment plan to select, whether to consolidate their loans or whether they are eligible for loan forgiveness. If your child has taken out loans, they have a six month grace period after graduation before Direct Subsidized and Unsubsidized Loan payments need to begin, and there are deferment options available based on economic hardship and unemployment.
If I decide to make my child's student loan payments, may I deduct the associated student loan interest on my income tax return?
No, even though you pay the loan payments direct and not to the child, only the taxpayer legally obligated to repay the student loan may deduct the associated interest payments on their tax return. Your direct payment is considered a gift.
An adult child is living in their own home, and is having financial problems (either through losing a job, reduced pay or similar).
If I pay mortgage payments for my child, am I making a taxable gift to my child?
If you choose to assist your child in making their mortgage payments, the mortgage payments become a taxable gift if the payments, along with other gifts, total more the $13,000 annual exclusion as described under scenario one.
I paid the mortgage payments, so I get to deduct the mortgage interest on my income tax return, right?
No, only the taxpayer obligated to make payments under the mortgage would be able to deduct the related interest for that loan.
Should I stop contributing to our retirement savings so that we can pay our child's mortgage costs?
It is usually not a good idea to stop contributing to your own retirement plans. You risk giving up matching contributions from your employer, and you give up the time and funding your retirement plan needs to grow for you. This puts your own financial future at risk. If you have additional resources, and want to help out your child, that would be a better option.
An adult child with children experiences divorce, legal issues, abuse issues or for another reason, moves back to mom and dad's.
If I assist my child or grandchild with their medical or educational expenses, would those payments be considered a taxable gift?
If the payments are made directly to the health care facility or to the educational institution they are not considered taxable gifts. If payments are made to your child or grandchild directly, the payments are considered taxable gifts if the payments, along with other gifts, total more than the current $13,000 annual exclusion as described previously.
If I pay my child's and/or grandchildren's medical or education expenses, may I deduct these expenses on my tax return?
There are different rules for the deduction of medical and education expenses paid on behalf of family members. Higher education credits and the tuition and fees deduction may only be claimed when the family member is a dependent on your tax return. If you cannot claim your child or grandchild's dependency exemption, but you provide more than half of their support, you may deduct, subject to the 7.5% floor, the direct medical expenses you paid on their behalf.
Your adult child may be claimed as a dependent on your income tax return if your child's gross income is less than the exemption amount ($3,800 in 2012) and you provide more than half your child's support for the year. You may claim your grandchild as a dependent on your tax return if your grandchild's income is less than the exemption amount, you provide more than half their support and your grandchild's parents are not required to file a tax return. If you provide half your child or grandchild's support, and the person is under 19 (or 24 and is a full-time student), and lives in your home for more than half the year, you may claim the family member as a dependent even if their income is greater than the exemption amount.
Is there a way I can help my grandchild or child with their education costs without making the funds available to an ex–spouse?
You can contribute to a 529 plan for college education expenses. You remain the owner of the account (participant) and you designate the funds for use by your child or grandchild (beneficiary). The funds you contribute to a 529 are considered a gift and are subject to limits. If your child or grandchild is currently enrolled in college, you can also pay their tuition direct to the institution and it won't be considered a gift. Check with your tax advisor about a potential state income tax deduction for contributions to 529 plans.
This article is part one of a two-part series to address some of the primary financial, wealth and taxation issues encountered by an individual from the Sandwich Generation. In the second part of the series (to be published in the October), we will address some of the primary financial, wealth and taxation issues when a child cares for their parent, which is typically a more complex situation.