Federal tax laws allow you to make a tax-free gift to anyone except your spouse. If a niece or other family member needs financial assistance, you can make a tax-free gift to that person as long as you stay within the IRS guidelines. As of 2013, if you make mortgage payments that exceed $13,000 for one person in one calendar year, you must file Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, whether or not any taxes are due.
Gift Tax Credit
Under IRS regulations, any gift you make is nontaxable as long as the total amount does not exceed the IRS-set gift tax credit for the calendar year. For 2013, the credit was set at $13,000 -- an amount that can be adjusted each year for inflation. For 2013, the credit means you can make as many $13,000 tax-free gifts as you like, provided each gift is made to a different person. If you are married, your spouse also can make a $13,000 tax-free gift to the same person. For example, your niece could receive $26,000 tax-free if you and your spouse each gave her $13,000.
In addition to the gift tax credit, the IRS gives every person a unified credit. Also known as the lifetime exclusion, the unified credit amount for 2013 is $5.12 million. If a gift exceeds the $13,000 gift tax credit, the unified credit will offset the difference. The unified credit is a lifetime credit that can be used only once. For example, if your total gift amount reaches the maximum unified credit threshold of $5.12 million, the amount of any later gift that exceeds the $13,000 gift tax credit will be taxed.
Monthly Mortgage Payment
If you pay your niece’s monthly mortgage payment, you can deduct the amount from your $13,000 gift tax exclusion. As long as the total amount of the mortgage payments is no more than $13,000, you have no gift tax liability. If the amount exceeds $13,000, your unified credit will cover the difference. For example, you make $15,000 of mortgage payments for your niece in one calendar year. You use your $13,000 gift tax exclusion, but the remaining $2,000 still would be taxable. By using $2,000 of your $5.12 million unified credit, the entire $15,000 is a tax-free gift.
Paying Off the Mortgage
Unless your niece already has paid off most of her mortgage, your $13,000 gift tax exclusion probably won't cover the total amount. But you could pay it off and apply your unified credit. For example, it costs you $500,000 to pay off your niece’s mortgage. After applying your $13,000 gift tax credit, you use your unified credit to eliminate the gift tax on the remaining $487,000. Your unified credit is reduced to $4.633 million ($5.12 million minus $487,000.)
- IRS Publication Instruction for Form 709 –- Who Must File
- IRS Publication 950: Introduction to Estate and Gift Taxes –- Filing a Gift Tax Return
- IRS Publication 950: Introduction to Estate and Gift Taxes -– Unified Credit
- IRS Publication 950: Introduction to Estate and Gift Taxes –- Applying the Unified Credit to Gift Tax
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.