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The Internal Revenue Service allows a grandparent to claim his grandchild as a dependent if the grandchild meets the IRS criteria of either a "qualifying child" or "qualifying relative." Both sets of criteria, however, prohibit a married grandchild from serving as anyone's dependent if he files a joint tax return with his spouse. A narrow exception to this restriction does exist, but most married people will not be eligible for it.
Married Dependent Issues
In most cases, married individuals cannot serve as dependents to other taxpayers if they file a joint return with their spouse. However, if the only reason your grandchild files a joint return is to obtain a refund of taxes actually paid – meaning that the refund isn’t the result of claiming a refundable tax credit – the joint tax return he filed won't prevent you from claiming him as a dependent. In that case, however, he must also meet other IRS qualifications to be considered your dependent, either as a qualifying child or a qualifying relative.
To be considered a "qualifying child," your grandchild must be under the age of 19 on the last day of the tax year, or if he's a full-time student, under the age of 24. No age restrictions apply, however, if your grandchild is permanently and totally disabled. In addition, each grandchild whom you claim as a dependent must reside with you for more than half of the tax year. Days your grandchild spends away from your home because of school or military service are considered days he resided with you.
Grandchild’s Financial Support
To claim your grandchild as a qualifying child, he must not provide more than half of his own financial support. Financial support generally refers to essential expenses only, such as housing, clothing, education and medical expenses. However, it isn’t necessary for you personally to provide more than half his support -- perhaps, for example, other relatives send you a check each month to help support the child. Whether it's you or a third party who pays is irrelevant: the focus of the qualifying child support test is whether a dependent’s own funds are used for his support.
If your grandchild is not a qualifying child, he may meet the criteria for a "qualifying relative" instead. A qualifying relative can be of any age, and he doesn’t have to live with you at all, but -- unlike the qualifying child rules -- you yourself do need to provide more than half of your his financial support. Your grandchild’s gross income must also be less than the amount of the dependent exemption for the relevant tax year.