Generous Gift or Tax Liability?
Imagine gifting your daughter and her husband $50,000 for a down payment on their new home. Will this generous act trigger gift taxes? The answer lies in understanding federal gift and estate taxes, which only apply to very wealthy households. Unless you’ve gifted approximately $13 million over your lifetime, these taxes likely won’t affect you.
Navigating Mortgage and Gift Tax Implications
When your daughter applies for a mortgage, the lender will scrutinize her finances. Receiving a gifted down payment can raise concerns, as lenders have rules around who can provide the funds. To avoid complications, you may need to “season” the money by transferring it more than 60 days in advance or provide a gift letter, which confirms the transfer is unilateral and without expectation of repayment.
Understanding Gift Tax Rules
The IRS imposes a tax on unilateral transfers, known as gift tax. If you give someone money or assets without expecting fair-value compensation, you’ve made a gift. Gift tax rates range from 18% to 40% based on the size of the gift. However, two important provisions limit the impact of gift tax: the annual exclusion and the lifetime exemption limit.
Annual Exclusion and Lifetime Exemption
The annual exclusion allows you to give a set amount to someone each year without triggering gift taxes. In 2023, this amount is $17,000 for individuals and $34,000 for married couples. The lifetime exemption limit is the amount you can give away over your lifetime without triggering gift or estate taxes. In 2023, this limit is $12.92 million for individuals and $25.84 million for married couples.
Tax Implications for Your Daughter’s Down Payment
If you’re single and give your daughter the $50,000 down payment in 2023, the first $17,000 will be tax-free. The remaining $33,000 will lower your lifetime exemption. If you’ve never made a taxable gift, you won’t owe gift tax, but your lifetime exemption will decrease. If you’ve already exhausted your lifetime exemption, you’ll need to pay taxes on the excess gift.
Managing Tax Liability and Finding Financial Guidance
Unless you’ve gifted more than $12.92 million over your lifetime, you can likely give a $50,000 down payment to your daughter without owing gift taxes in 2023. However, it’s essential to navigate the paperwork correctly to avoid complicating the loan. Consider consulting a financial advisor to strategically give away assets and minimize potential estate tax liability.
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