My wife and I would like to gift/loan our daughter and her husband $100,000 for a down payment on a home. Our understanding is that we can either (A) pay 40 percent tax on this gift, or (B) apply this amount against every taxpayer’s lifetime exemption of $11.18 million. Of course, we want to choose (B). Are we OK with this choice, or are we at risk of paying a 40 percent tax come tax day?
The (A) and (B) options to which you alluded really are not options. Gift tax will not be payable until the lifetime exclusion amount (currently $11.2 million per person) is exhausted. In effect, the default answer is option (B), and there is no risk of paying gift tax unless you and/or your wife exceed the lifetime exclusion amount.
I also want to mention that you initially referenced the money as a “gift/loan.” If it is a loan, it should be documented with repayment terms included. The tax code stipulates that at least a minimum interest rate be stated and charged. These rates are known as the Applicable Federal Rate (AFR). This interest would then need to be paid to you by your daughter or imputed into your income annually until the loan is repaid. Unless you plan and expect to be repaid, just go with a straight gift of the funds for the down-payment.
Finally, please note that even though no gift tax will be payable, a gift tax return (Form 709) does need to be completed and filed for the calendar year of a gift whenever the gift exceeds the annual exclusion amount (currently $15,000 per person).
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Answered by: Alan M. Schapire, CPA, is a principal with Convergent Financial Strategies LLC in Wayne, Pa.