Buying overview -> Gift fund tax issues

Gift fund tax issues

It’s a good policy for a donor to talk to a CPA or
financial advisor before gifting money.

Gift fund tax issues

If you are going to be receiving gift money from a family member to help with your purchase, this will be a useful summary of general gift tax rules and issues. There are two primary considerations:

  • the maximum amount that can be given without triggering tax consequences for the donor and
  • the tax consequences for the donor if that amount is exceeded.

There are normally no tax issues for the receiver of a gift.

 
Any person may make a gift of up to $14,000 annually to multiple recipients without having to file a gift tax return. For example, two parents can each give $14,000 to one child for a total of $28,000, or they can gift $56,000 to a couple. So if Alex and Chris are buying a home together, and Chris’s parents want to help, Chris’s mom can give $14,000 to Alex, and $14,000 to Chris; Chris’s dad can do the same—totaling $56,000. This should be done in four separate checks. If the donors use only one check, or a wire transfer, technically an IRS Form 709 should be filed, electing gift-splitting, something a qualified tax professional should review.

Because the $14,000 limit is for the calendar year, a donor can gift $14,000 in the last week of December, and another $14,000 in the first week of January without triggering a tax event. Another option, if the gift exceeds $14,000, is to have the donor do a combination of a $14,000 gift and a loan for the amount in excess of the $14,000. The donor can then forgive up to $14,000 of the loan each year. If you do want to do a combination of a gift and a loan you will need to check with your lender to see if that is allowed on the loan program you have chosen.

If the $14,000 annual limit to an individual is exceeded, there is no immediate tax event; it is the donor’s estate, in the future, that will have a tax consequence. Whenever the annual limit is exceeded, the donor—not the recipient—must file a Gift Tax Return, IRS Form 709. However, there is no immediate tax owed when the $14,000 limit is exceeded with one rare exception. As of April, 2013, every person is allowed a lifetime tax exclusion of $5.25 million for gifts that exceed the $14,000 per person annual limit. When the $5.25 million lifetime limit has been met, there is an immediate tax cost for additional gifts.

If the donor hasn’t hit the $5.25 million dollar mark in total gifts, but has exceeded the $14,000 annual limit to an individual, there is no immediate tax owed, but the donor’s estate may have a higher tax bill. Inheritance tax is currently based on the value of an estate less a $5.25 million exclusion. If the deceased has exceeded the gifting limit, the $5.25 million dollar exclusion declines by the total amount that the gift limit has been exceeded during the lifetime of the deceased. Of course, there are exceptions to this rule, especially for those with large estates, and the amounts of the exclusions, both for individual gifts and the lifetime exclusion, change frequently.