Unless you have given away more than $13 million in your lifetime, a $75,000 gift will not trigger the federal gift tax. Using this for a down payment also does not affect the result.
A financial advisor with estate planning expertise can help you navigate the gift and estate taxes. Connect with a fiduciary advisor today.
In fact, most families will never have to worry about either the gift tax or the estate tax thanks to gifting exemptions that are adjusted upward every year to account for inflation. In 2024, you can give away $18,000 to as many individual people or entities as you want without triggering a reporting requirement. Any gifts that exceed this limit simply count against your $13.61 million lifetime exemption. As a result, for all but the wealthiest households, $75,000 will fall well below any tax threshold.
What Is the Gift Tax?
Like all income, the IRS taxes unilateral transfers. This tax applies to any situation where you give someone assets without receiving fair market value in return. For example, if you sell someone a $500,000 house for $10, this would be considered a $499,990 gift.
The tax on unilateral transfers is a single tax known by two different names, either the gift tax (if you make the transfer while alive) or the estate tax (if you make the transfer after death).
Gift tax rates range from 18% to 40% of the taxable gift depending on the amount in question. The donor, not the recipient, pays this tax in their filings for the year in which they made the transfer.
However, both the gift tax and estate tax only apply to very wealthy households. That’s because, throughout your life, the IRS allows you to give away a certain amount of money and assets free of any taxes. This is known as the lifetime exemption, and in 2024, it’s worth $13.61 million.
The IRS also allows you to gift up to $18,000 to as many people as you like in 2024. This is known as the annual exclusion. For example, say you have three adult children and you give each of them $25,000 in 2024. You won’t have to pay taxes on this money, but the three gifts will reduce your lifetime exemption by $21,000 since each one exceeded the annual exclusion by $7,000. If you give above this amount to a single person, you must report the excess gift on Form 709 when you file your taxes.
Keep in mind that everyone has both a lifetime exemption and annual exclusion limit, even married couples who file their taxes jointly. This means in 2024 each spouse can gift $18,000 to as many people as they like and each spouse can give away up to $13.61 million over their lifetime before triggering any taxes. But if you need additional help with your gifting strategy, consider working with a financial advisor.
Applying the Gift Tax to a $75,000 Gift
The gift tax may apply regardless of the purpose or recipient. So, for example, giving an adult child money toward a down payment on a home would not change the taxable nature of the gift.
In most situations, a $75,000 gift would not trigger any taxes. Giving money within a family can be particularly advantageous, as John Wood of Grant Park Legal Advisors noted.
“Each parent may make a gift of up to $18,000 in 2024,” he said. “As a result, two parents may give their child $36,000. If that child is married, they could potentially give that child’s spouse a similar gift, allowing them to accomplish their goal without resulting in a gift-reporting requirement.”
Even for families that do give above the annual limit, he said, this is still only a reporting requirement unless your future gifts and estate exceed the lifetime exemption. However, a financial advisor with estate planning experience can help you navigate both the gift and estate tax exemption limits.
To understand this further, let’s look at a few examples:
Scenario 1: Individual With No Giving
- Filing Status: Single
- Lifetime Exemption Used: $0
- Taxes Owed on $75,000 Gift: $0
First, picture yourself as a single filer. You have never given any gifts above the annual exclusion, so you have never used any of your lifetime exemption. A $75,000 gift to your son would exceed your annual exclusion by $57,000, reducing your lifetime exemption by the same amount. Since you have your full $13.61 million lifetime exemption, there is no tax liability but you will reduce your lifetime exemption to $13,553,000.
Scenario 2: Individual With High Giving
- Filing Status: Single
- Lifetime Exemption Used: $13.60 million
- Taxes Owed on $75,000 Gift: $9,880
Now, imagine that you’re an individual filer with considerable wealth. You’ve given away enough money to various individuals and organizations during your lifetime and have used up all but $10,000 of your lifetime exemption.
When you give your son $75,000 for his down payment, the gift exceeds the annual exclusion by $57,000 and exhausts the remaining $10,000 of your lifetime exemption. As a result, you’ll owe taxes on $47,000 of the gift and pay a 24% tax. However, the gift tax is marginal, meaning only a portion of the taxable gift is subject to the 24% tax rate, with lower rates applying to the rest of the gift. In the end, you’d owe $9,880.
Example 3: Gift Splitting Among Spouses
- Filing Status: Married, Joint
- Lifetime Exemption Used: $0
- Taxes Owed on $75,000 Gift: $0
Now, imagine that you’re married and file your taxes jointly with your spouse. Neither spouse has given gifts above the annual exclusion in any year, nor have you given your son any money this year.
As a result, you could engage in what’s called “gift splitting.” This means that you and your spouse each claim a portion of the gift. And since you each get an $18,000 annual exclusion, you can give your son $36,000 in one year. The remaining $39,000 will then count against your lifetime exemptions. However, since you split the gift, each person’s lifetime exemption is reduced by just $19,500.
If you’re thinking about giving away a large sum of money, it may be wise to speak with a financial advisor before you do to go over any tax implications – good or bad – of the gift.
Gifting a Down Payment
There are no special gift tax rules around a down payment but the mortgage system can make this process a little more complicated. Banks use down payments to assess whether a borrower can afford to pay the loan, so they add extra steps when the money comes from a third party. The IRS and the federal government also pay closer attention to third-party down payments, as this is a popular form of fraud and money laundering.
Broadly speaking, there are three main considerations here:
Gift Letters
Lenders will carefully review the finances of any borrower, so they will see if a third party transferred them the down payment money. Make sure to provide a letter or other documentation stating that this is a gift, not a loan or other form of ongoing interest. Also, state your relationship with the recipient to prevent suspicion of money laundering. Both banks and the IRS can disallow down payment gifts that don’t come from someone close to the recipient.
Season the Funds
Transfer the money at least 60 days before the borrower applies for their loan. This is called “seasoning the funds.” Lenders frequently require it as a way of preventing money laundering, as last-minute transfers may indicate fraud.
Direct Payment
Typically it is better to give the borrower money for a down payment directly. However, in some cases, you can make the down payment directly to the lender. If so, you will likely have to appear on the loan paperwork in addition to the borrower. This is permissible, but it will be complicated and slow down the mortgage process.
Giving someone a down payment will not affect their title or interest in the house. So long as you make the transfer with no requirements or strings attached, the money is theirs and the title will be clear.
Bottom Line
Only very large gifts trigger federal gift tax. In 2024, the IRS allows individuals to give away up to $18,000 per recipient and $13.61 million throughout their lives. Only gifts that exceed this annual limit count as taxable gifts. As a result, as long as your lifetime giving hasn’t exhausted the $13.61 exemption limit, a $75,000 gift for a down payment in 2024 won’t incur gift taxes.
Tips for Structuring Large Gifts
- Family giving raises some of the most common questions when it comes to the gift tax. This is particularly true now, with a historically wealthy Baby Boomer generation entering retirement. That’s why members of the younger generations need to understand the potential tax implications of receiving gifts and inheritances.
- A financial advisor with estate planning expertise can help you optimize your giving strategy and plan your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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