Money gift question

[dabuddha]

I'm hoping someone has a solution for this. If I want to gift an amount of money for someone so they can use it as a down payment for a house, is there a way to avoid paying taxes on it (essentially being double taxed on it). Say it's $50,000. I know the IRS limit was 12 or 14 thousand. Any ideas/suggestions?

TIA

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[PowerEngineer]

How about making it into a $50k loan at low (zero?) interest and then forgiving a portion of that loan (as a gift) each year until it is gone?

 

[dabuddha]

How about making it into a $50k loan at low (zero?) interest and then forgiving a portion of that loan (as a gift) each year until it is gone?

That might be worth looking into though I wonder if he'll qualify for a mortgage if he suddenly has this $50k loan

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[DietDrThunder]

For 2018 the gift threshold increased to $15K per person. If they are married and you are married both you and your spouse can easily gift the $50K without hitting the tax threshold. For example, you would gift the husband $15K, then you could gift the wife $15K, then your wife could gift the husband $10K, then your wife could gift the spouse $10K.

But in reality, it doesn't really matter if you just gift the person the full $50K. If you tap into the lifetime gift tax exemption, it erodes the estate tax exemption amount that would be available when you die, which in 2018 is $11,200,000 for you and $11,200,000 for your spouse. A gift tax return is required if you individually exceed the annual gift tax exclusion amount or a joint gift with your spouse collectively exceeds the amount. For the latter, each spouse must file an individual gift tax return for the year in which they both make gifts. But no actual taxes are paid. It just documents the fact that you made the gift that exceeds the annual threshold, and just reduces the estate tax exemption amount of $11,200,000 by $50,000 for when you die.

The only reason I am familiar with these rules is because I just finished taking an estate planning course at our local university.

 

[Ns1]

That might be worth looking into though I wonder if he'll qualify for a mortgage if he suddenly has this $50k loan

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Do you plan to report him to the credit agencies?

 

[momeNt]

Do you plan to report him to the credit agencies?

Its not so much that it would be reported, but they will ask where the 50k is coming from when they see his bank statements. Sometimes mortgage companies will ask for a gift letter or something so they go into closing knowing the funds will be there.

 

[dullard]

Cepak has it correct. You can gift that money without worry about taxes as long as you document it properly.

dabuddha and momeNt are also correct. The money needs to be in the bank account for a minimum of two* bank statements otherwise the bank might question whether this is a gift (the bank doesn't care) or a loan (the bank cares immensely and will affect the mortgage that they are willing to provide).

* exact number may vary by bank.

 

[dabuddha]

So in my case (single) and he's married, I could gift 30k with worries. But given that we're way below that threshold (the 12 million one and I doubt I'll ever be near that in my lifetime ) I won't need to worry about the taxes right? I can just provide a gift letter along with the money (since it won't be sitting in his account for two bank statements since his closing is next month)

 

[DietDrThunder]

So in my case (single) and he's married, I could gift 30k with worries. But given that we're way below that threshold (the 12 million one and I doubt I'll ever be near that in my lifetime ) I won't need to worry about the taxes right? I can just provide a gift letter along with the money (since it won't be sitting in his account for two bank statements since his closing is next month)

You don't have to worry about paying any taxes. You will however need to file IRS form 709 for the 2018 tax year. The only form available at this time is for 2017, so you'll have until April 15th of 2019 to file.

Even if you have made a taxable gift, Form 709 isn't as big of a burden as many think. That's because unless you've made a huge gift, we're talking a gift exceeding $11.2 million, you won't have to pay any actual gift tax.

The U.S. has a unified gift and estate tax system at the federal level, meaning that for purposes of implementing estate and gift taxes, gifts you make during your lifetime are treated similarly to gifts made from your estate after your death. Everyone has a lifetime exemption from gift and estate tax -- $11.2 million for 2018 -- and even after you use up your $15,000 annual exclusion and any other provisions that apply, any remaining gift amount applies against your lifetime exemption amount.

For example, say you make a gift of $50,000 to someone this year. The first $15,000 is covered under the annual exclusion amount, leaving $35,000 remaining as a taxable gift. No tax will be due, though, because that $35,000 will count against the $11.2 million lifetime exclusion amount. At your death, that $35,000 will be added to the value of your taxable estate, and if it's above the then-applicable lifetime exclusion of $11.2 million, then you could have estate tax liability.

By the way, estate taxes on amounts over $11.2 million is 40%.

 

[DaveSimmons]

Just as a word of caution: if they can't afford the down payment can they afford the mortgage?

If they are living at the edge of their means, have credit card debt, are not saving for retirement then perhaps they should wait a year and improve their financial health first.

It will be a shame if you give them this very generous gift and then have them lose the house because they can't make the payments.

 

[MrSquished]

Good to know about the limit going up to 15K per person. Family needs to transfer a bit of money over here from overseas. Thanks!

 

[DietDrThunder]

Good to know about the limit going up to 15K per person. Family needs to transfer a bit of money over here from overseas. Thanks!

Unless they are U.S. tax payers, I would think the country of origin's tax rules would apply. I guess it all depends on what "from overseas" means.

 

[MrSquished]

Unless they are U.S. tax payers, I would think the country of origin's tax rules would apply. I guess it all depends on what "from overseas" means.

Yah we are checking what the rules are now from our motherland, because years ago when we did a few transfers it was a different time for the banking industry there. But at the time, on the US side, it was 10K per person.

 

[Skunk-Works]

So you mean to tell me that if I were to pay off my parents house I would have to pay taxes on that?

 

[DietDrThunder]

So you mean to tell me that if I were to pay off my parents house I would have to pay taxes on that?

No, you would NOT have to pay taxes on paying off your parents house. Please re-read the above post #8 in this thread. You will however need to file IRS form 709 for whatever tax year you pay off your parents house. I will say that estate laws are different for every state and I will keep the examples at the Federal tax level.

I'll give you an example that may fit your situation. Let's say you make a gift of $125,000 to your parents this year to pay off their house. You will have to file IRS form 709 before April 15th of 2019. The first $15,000 is covered under the annual exclusion amount, leaving $110,000 remaining as a taxable gift. NO TAX WILL BE DUE, though, because that $110,000 will count against the $11.2 million lifetime EXCLUSION FROM TAXES amount. At your death, that $110,000 will be added to the value of your taxable estate, and if your taxable estate is above the then-applicable LIFETIME EXCLUSION FROM TAXES AMOUNT of $11.2 million, then you could have estate tax liability. So, let's say upon your death at 102 years old, that your estate is worth exactly $11,200,000. Then that one time gift of paying off your parents home will be added to your gross estate and estate taxes will be owed, but not as much as you envision.

Your gross estate at death value is $11,200,000
Plus the remaining taxable gift of $110,000
Total gross estate at death value is $11,310,000
Minus the lifetime exclusion of $11,200,000
Taxable amount at death is $110,000
Tax rate of 40%
Total taxes due on the estate after death is $44,000

Now let me give you another example: Let's say upon your death at 102 years old, your gross estate is worth $8 million. Now let's do the calculation.

Your gross estate at death value is $8,000,000
Plus the remaining taxable gift of $110,000
Total gross estate at death value is $8,110,000
Minus the lifetime exclusion of $11,200,000
The taxable amount is $0 because you still have $3,090,000 of tax free exclusion remaining.

This gets even better if you are married. The taxable exclusion is $11,200,000 for EACH spouse, and upon one of your deaths, the exclusion amount will be transferred to the other spouse. So let's say you die first. You die at 102 years old and your wife or whatever gender you are married to is still alive. Your lifetime exclusion is transferred to your spouse for a total lifetime exclusion of $22.4 million. That is $22,4 million that are not subject to any taxes whatsoever at the Federal level.

 

[dasherHampton]

Welp, I'm sold, Cepak.

You seem to know what you're talking about here.