John and Jane Doe are happily married with three kids. They decide that it's time to set roots and buy a home. They sit down and run the numbers. They can afford to pay a mortgage; however, they don't have the money for a down payment. John reaches out to his parents, and his parents are generous enough and are offering to help them out with a down payment as a gift. Following are the answers to five common questions that often get asked.
- The question that gets asked by potential homebuyers is, "Is a gift given to me in the form of cash or check by a relative taxable"?
Answer: Recipients of a gift generally never owe income tax on the gifts.
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Follow-up question: can a gift be given tax-free by the donor/giver?
At the risk of losing your interest to continue reading, I'll get to the point – Yes, if it’s $17,000 or less.
There is an "annual exclusion amount" every year. For 2023 the exclusion amount is $17,000 per person. Therefore, it would not be subject to gift tax and, no Gift Tax Return is due to be filed.
- Married couples can combine their "annual exclusions," so each parent can give $17,000, and that would make it $34,000 from both parents combined. If they choose to gift the husband and wife (John and Jane), the total gift amount can be up to $68,000 and be excluded from filing.
If the funds are coming out of a joint bank account, it is recommended that each parent/donor writes a separate check or transfer. If they want to issue a single combined check or transfer, they will be required to file a gift tax return and do a "gift-splitting" election.
- Question: since the "annual exclusion amount" can be given to any number of people, can the grandparents include a gift of $17,000 per grandchild?
Answer: For adult children, yes, but for minors, there is an issue. While the giver/donor can give money to a minor, there are special rules on how the money is supposed to be treated. The money is supposed to be deposited into a UTMA Account or in a trust. This will prevent you from using the money for the down payment.
- Remember that the donor/giver can always use the "lifetime exclusion," in which case the gift amount can be greater than $17,000.
The "lifetime gift and estate tax exclusion" looks at all gifts you gave greater than $17,000, accumulated throughout your lifetime. For 2023, the "lifetime exclusion" is $12.92 million for individuals and $25.85 million for married couples. Gifts below the "lifetime exclusion" will not be taxable for federal tax purposes.
- Question: Are there any exceptions to the rule? Is there a way for me to be exempt even if the gift is above the annual exclusion amount?
Answer: Per the IRS, tuition or medical expenses you pay for someone is excluded from your annual limit.
↔️ Selling your home and are concerned about capital gain taxes? Check out this article
We only addressed here the gift and how it affects your taxes. You should reach out to your mortgage broker for guidance on what banks will consider a valid gift.
The tax code for gift tax is detailed and complex. The purpose of this article is to only serve as a primer on the topic. Please consult with your tax adviser for further guidance.
Read more FAQs by the IRS here. If you'd like to read more resources, check out IRC 2503, IRC 2513, Forbes Article (from 2014), and Uniform Gifts to Minors Act.
This blog was updated to reflect IRS 2023 guidelines.