If you want to help someone buy a home, you can give as much of a gift as your generosity allows. However, you can't necessarily do it without any tax implications. Unless you're helping a charity, the money you give isn't tax deductible to you, and if you give too much, you – or your estate – could actually end up having to pay taxes on the money you gave away.
Definition of a Gift
According to the IRS, a gift is anything you give without receiving something of comparable value in return. If your niece cares for a sickly family member in your home all year, and if you learn that she's struggling to buy a home, you might give her $50,000 toward a down payment. You could conceivably say that you paid her for her efforts. In this case, you received something in return – you paid her $50,000 for her work. However, if your niece has always been your favorite and you give her $50,000 just because you love her, it's a gift.
The entire $50,000 you give isn't vulnerable to taxation. The IRS allows exclusions, a dollar limit you can give away tax-free. As of the 2018 tax year, the exclusion amount is $15,000 for each person you make a gift to. If you're married, you can double that: you and your spouse are each entitled to give away $15,000 per person. Therefore, if you gave your niece a $50,000 gift and you're single, you'd only have to be concerned about paying a gift tax on $35,000, because the first $15,000 is immune. If you're married, the taxable amount drops to $20,000. If you limit your gift to only $15,000 if single or $30,000 if married, you won't owe a gift tax at all.
The Gift Tax
Presumably you already paid taxes on the money you're giving at the time you earned it. If your generosity qualifies as a gift with the IRS, you may have to pay taxes again on the amount that exceeds the exclusion: once in income tax, then again for the federal gift tax. Gifting money over the exclusion limits requires filing Form 709 with the IRS along with your return. Money in excess of the gift tax exclusion will be counted towards your lifetime gift tax exclusion, which been set at $5.6 million for 2018. You will only be required to pay a gift tax when you exceed the lifetime limit.
You have the option of not paying the gift tax and allowing your estate to pay the tax instead when you die. The IRS offers a lifetime gift tax exclusion that allows you to give away up to $5.6 million over the course of your entire life, as of 2018. You therefore avoid paying a gift tax in the year you gave away the money and lessen the tax-exempt portion of your estate when you die. The same $5.6 million credit applies to estates; only those with a value in excess of this must pay estate taxes. Therefore, if you use $35,000 of the credit to offset the gift you gave your niece, your estate will have to pay estate taxes on any amount greater than $5.565 million, not $5.6 million.
- spending money image by Richard J Thompson from Fotolia.com