Setting Financial Ground Rules For “Boomerang” Kids

Thomas Wolfe wrote You Can’t Go Home Again, but try telling that to the millions of young adults who have returned to the family nest. According to the California Society of CPAs, more and more parents are facing the financial challenges that surface when adult children come back home. These temporary arrangements could become a long-term drain on your finances. The best advice for parents of “boomerang” kids is to establish a clear understanding of financial ground rules.

Communicate Expectations Clearly
Parents and children should work together to negotiate a cost-sharing arrangement that takes into account the needs and expectations of both parties. Determine from the start the approximate length of stay and what contribution—financial and otherwise—the young adult will be expected to make. Resist the temptation to offer your adult child a “free ride.” Your child’s contribution can help to build his or her self-esteem, create a sense of responsibility, and develop independence.

There’s No Such Thing As A Free Breakfast, Lunch, And Dinner
Most financial experts recommend that you charge your child at least a nominal amount for room and board. Establish a figure in proportion to how much your child earns. You might agree to later refund a portion to your child to help meet the security deposit or first month’s rent on a new place to live. If your child does not have a job and can’t afford to help out financially, he or she could substitute with yard work, household help, or repair work in exchange for room and board.

An Ounce Of Protection
Most health insurance policies discontinue coverage when the dependent is no longer a full-time student or reaches the age of 23 to 25. After that, your adult child may qualify to remain on your policy under COBRA benefits, but the premiums can be costly. One option may be an individual short-term policy, most of which are renewable for up to a year. As long as your adult child is healthy, he or she can save money by selecting a high deductible of $1,000 or more.

Auto and homeowner insurance are important issues as well. If your adult child will be driving the family car, you need to add an extra driver to your policy. In the event that your child already has his or her own car and insurance, joining your policy may result in lower payments. In terms of homeowner’s insurance, check with your carrier to see if you need extra coverage, especially if your child has expensive computer or stereo equipment.

IOU Or I Thank You
If you plan to give your child money, be sure that you both understand whether it’s a loan or a gift. When offering a loan, you may want to make it official by drawing up a written agreement that outlines the details, including repayment terms.

Credit card debt is a common problem for recent college grads. However, rather than bailing out your adult child, help him or her set up a budget and work out a repayment plan. You can also suggest that your child meet with someone at a credit counseling service. If your adult child is job hunting and has student loan debt, he or she may be able to request a deferment of payment until gainfully employed.

Getting The Deduction You Deserve
You may qualify for a tax deduction for your boomerang kid as long as you provide more than half of your child¹s support and the child earns less than $2,800 in 2000, or is a full-time student under age 24.

Divorced or widowed parents may be able to get some extra help. If you were single at the end of last year and paid more than half the cost of maintaining a home where you lived with your unmarried child, you may be able to file as head of household rather than as a single taxpayer. This gets you a bigger standard deduction and lower tax rates.

If you have any questions about the tax implications of your child returning home, you may want to consult a CPA. Your CPA can also act as an independent third party in helping you and your adult child work out the financial details of this new, albeit temporary, living arrangement.

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.