Gift Tax

[DonQuixorge]

Situation: My mother is giving me $50,000 for a down payment on a house. She's making a bank transfer into my savings account. She lives in Illinois and I live in Minnesota. I know this passes the annual federal gift tax limit of $15,000, but it does not pass the lifetime exclusion limit of $11.4 million. Minnesota does not have a gift tax. Illinois has the gift tax rolled into the estate tax with a lifetime exclusion of $4 million. 

My understanding: As the receiver, I do not have to pay any tax. As the giver, my mother will have to file a Federal Form 709 for the year she made the gift (i.e., gift given in 2020, file in 2021 for tax year 2020). She will not have to pay any tax because that amount, though over the yearly limit, is not over the lifetime exclusion. Her lifetime exclusion limit will be reduced by $35,000 ($50,000 minus the $15,000 yearly exclusion). For Illinois taxes, her lifetime estate tax exclusion will also be reduced by $35,000. 

Questions:

1. Is my understanding correct?

2. Will my mother have to file Form 709 every year after the first time filing it, or only during years she gives more than the exclusion? 

[Critter]

1. Is my understanding correct?  You are correct.

2. Will my mother have to file Form 709 every year after the first time filing it, or only during years she gives more than the exclusion?  It is only filed in the years that something needs to be reported not every year. 

[tagteam]

Your understanding is mostly correct.

However, the lifetime exemption for 2020 is $11.58 million.

See  https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

A Form 709 would not need to be filed in subsequent years unless the annual exclusion is exceeded.

Your mother might want to get professional guidance for the purposes of preparing the 709.

[jtax]

Your understanding is correct. A 709 is only needed for the year of a gift over the annual exclusion amount (currently $15k) . If there is no future gift, no future 709 need be filed.

Be sure to keep the 709. It may be needed when your mother passes away. Also keep the address it is sent to.  (That is asked for on a 706 if it is filed).

Note there is a difference between an estate tax and a inheritance tax. An estate taxes tax everything the decedent owned when they died. That's why they have to deal with gifts one way or another. Otherwise you could just give away everything the day before you die. An inheritance tax applies not to the giver but rather the recipient. 

Because your mother lives in IL now, that is the state that matters for estate and gift tax. There is no IL gift tax form, but it appears that lifetime gifts (over the annual exclusion amount) will be added back to your mother's estate (if she still lives in IL when she dies).

Because you live in MN now that is that state that matters for inheritance tax. (Don't get hung up on "inheritance" it can apply to lifetime gifts). Since MN (and most states) don't have an inheritance tax, you don't need to worry about that.

I assume from the language of your post that your mother isn't married. It is worth noting that the annual exclusion limit is $15k per donor per recipient per year. So if she were married and you where married each parent could give each of you and your spouse $15k per year = $60k and no 709 would be required. (I would do each payment separately. Married donors can "gift-split" but a 709 would be required).

[tagteam]

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@jtax wrote:

Otherwise you could just give away everything the day before you die.

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You actually cannot do that with respect to certain gifts anyway as a result of Section 2035.

[Carl]

file in 2021 for tax year 2020).

The IRS Form 709-Gift Tax Return is really not a "return" of any type in any way, form or fashion. It is only a "report". It's not filed with any income tax return and you don't have to wait until tax filing time. She can complete and mail the 709 "right now" if she wants, and be done with it. As you said, nobody will pay any taxes on it - at least not a "gift tax". That money your mother gave you, she probably already paid taxes on in a prior year anyway - or at least a vast percentage of it.

Overall though, she might want to wait until your mortgate is approved and you have closed on the purchase. Having the down payment is no guarantee the loan will be approved.

[tagteam]

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@Carl wrote:

...you don't have to wait until tax filing time. She can complete and mail the 709 "right now"....

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The form cannot be filed "right now"; the 2020 version of Form 709 has not been released and the form is filed no earlier than January 1, but not later than April 15, of the year after the gift was made.

See https://www.irs.gov/instructions/i709#idm140554828300368

[jtax]

The mortgage approval may not really have anything to do with it. Once Mom has given up "control and dominion" (see Treas. Reg. 25.2511-2  https://www.law.cornell.edu/cfr/text/26/25.2511-2) the gift is complete. Depositing the money is the account seems like giving up control. Unless there is a legally enforceable agreement to the contrary. Wouldn't want to litigate that one.

[jtax]

@tagteam you're right about I.R.C. 2035 pulling in most gifts made w/in 3 years of death. But you get the idea. Without a gift tax estate tax can be entirely avoided by gifting assets more three years before death. Even $1B, say. But with the gift tax those gifts get added back into the estate. (For taxable estates it is still possible to get large estate tax savings with gifting because future appreciation escapes estate taxation, because of discounting, etc. but then again you lose the step-up. But of course capital gains rates are low.)

[tagteam · Accepted solution]

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@jtax wrote:

The mortgage approval may not really have anything to do with it. Once Mom has given up "control and dominion" (see Treas. Reg. 25.2511-2  https://www.law.cornell.edu/cfr/text/26/25.2511-2) the gift is complete....

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Yes, I would also assert that the mortgage approval has nothing to do with it. As you indicated, the gift is essentially complete unless the donor has reserved power over its disposition (which is highly unlikely in this instance and, I am reasonably certain, the vast majority of others). The post that mentioned the approval contains other inaccuracies, anyway, and should be ignored.

[TomD8]

I would just point out that virtually all mortgage lenders require that the borrower provide a "gift letter" if gifted funds are being used for a down payment.

Using gifted funds for a down payment can definitely have an effect on mortgage approval.

https://www.lendingtree.com/home/mortgage/gift-letter-for-mortgage/#:~:text=What%20is%20a%20gift%20l...

[jtax]

@Carl why do you say the 709 is not really a return? It is titled "United States Gift (and Generation-Skipping Transfer) Tax Return" and I.R.C. 6103(b)(1)  says 'the term “return” means any tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the provisions of this title which is filed with the Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or lists which are supplemental to, or part of, the return so filed."'

But I'm not sure why the name/type of the form matters. The form clearly states, as @tagteam says that it is only for that particular year's gifts. (Probably because the amounts change year by year, both the annual exclusion and the unified credit (or whatever it is called these days).

[tagteam]

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@TomD8 wrote:

I would just point out that virtually all mortgage lenders require that the borrower provide a "gift letter" if gifted funds are being used for a down payment.

Using gifted funds for a down payment can definitely have an effect on mortgage approval.

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That is absolutely correct but is also absolutely irrelevant for the purposes of this discussion, which concerns the annual gift tax exclusion and the preparation and filing of gift tax returns.

As @jtax pointed out earlier, the gift is complete once the funds hit the donee's account. It would still be considered a completed gift even if the mortgage was not approved (absent an agreement to the contrary).