What's needed for proving a large cash deposit is a gift?

You're on the right track! A gift letter from your grandmother is exactly what you need. Since the gift is under the annual exclusion amount ($17,000 for 2023), your grandmother doesn't need to file a gift tax return, and you don't need to report the gift as income on your tax return. For your own records, keep the gift letter that includes: the amount, date of transfer, statement that it's a gift with no expectation of repayment, and both your signatures. Also save any transfer documentation like bank statements showing the deposit. While the IRS doesn't typically question gifts under the annual exclusion, having this documentation protects you if there are questions during a mortgage application or an audit. The bank might actually be more interested in this documentation than the IRS, as they want to ensure down payment funds aren't actually loans.

I went through something similar last year with a gift from my parents for my house down payment. I was super stressed about documenting everything properly. After doing tons of research, I found this service called taxr.ai (https://taxr.ai) that was super helpful with this exact situation. I uploaded my gift letter and bank statements to their system, and they analyzed everything and confirmed I had proper documentation. They even provided a digital certification of my documentation that I kept with my records. The peace of mind was worth it since I was worried about the IRS questioning the large deposit. Their AI analyzes your specific situation and tells you exactly what you need.

Just wanted to update everyone. I decided to try taxr.ai after my earlier skepticism, and I'm actually really glad I did. Turns out my situation was more complicated than I thought because my gift came in multiple smaller deposits instead of one lump sum. The service pointed out that I needed separate documentation for each transfer to avoid any appearance of trying to circumvent reporting requirements. They also provided a template for a supplemental letter explaining the multiple transfers that my aunt and I both signed. I wouldn't have thought of that on my own! For anyone dealing with gift documentation, especially if there's anything unusual about your situation, having an expert review is definitely worthwhile.

If you're really worried about the IRS questioning your gift, you should know that reaching them directly to confirm requirements is actually possible now. I had a similar situation with a large cash gift last year and spent WEEKS trying to get through to the IRS helpline to confirm what documentation I needed. After endless busy signals and disconnects, I found this service called Claimyr (https://claimyr.com). They somehow get you through the IRS phone queue quickly. I watched their demo video (https://youtu.be/_kiP6q8DX5c) and was skeptical but desperate. Within about 30 minutes of using their service, I was talking to an actual IRS agent who confirmed exactly what documentation I needed for my gift. Saved me tons of anxiety wondering if I was doing things right.

I need to eat my words. After saying Claimyr sounded like BS, I decided to try it myself since I've been trying to reach the IRS about a different issue for weeks. It actually worked exactly as advertised. Their system called the IRS, navigated all the menus, waited on hold, and then called me when an actual human picked up. I was connected to an IRS agent within about 35 minutes, which is NOTHING compared to the hours I wasted trying myself. The agent confirmed that for gift documentation, a gift letter plus bank statements showing the transfer is sufficient in most cases. She also mentioned that for audit purposes, having the gift documented before the actual deposit is ideal, which was helpful advice I hadn't seen online.

One thing nobody's mentioned - if you're using this gift for a home purchase, your mortgage lender will almost certainly require gift documentation regardless of what the IRS requires. When I bought my house last year, my lender needed: 1. A formal gift letter (they had their own template) 2. Bank statements showing the money leaving the gifter's account 3. Bank statements showing the money entering my account 4. A signed statement that the gift was not a loan requiring repayment The lender was WAY more concerned about this documentation than the IRS ever would be. Just something to keep in mind if this is for a home purchase!

Not to add more worry, but make sure you're also thinking about your state's tax laws! I had a similar gift situation, and while the federal gift tax rules were straightforward, my state (Minnesota) has different thresholds and requirements.

Great question about state gift taxes! Only a handful of states actually have their own gift tax laws separate from federal. Connecticut and Minnesota are the main ones that come to mind, though the rules and thresholds can be different from federal. Most states don't have gift taxes at all - they just follow federal rules. But it's definitely worth checking your specific state's tax code or consulting with a local tax professional if you're dealing with larger gifts. For a $15,000 gift like the original poster mentioned, it would likely be under most state thresholds anyway, but always good to double-check! The state tax implications are usually much less of a concern than getting the federal documentation right.

California doesn't have a separate gift tax - you're good there! California follows federal gift tax rules, so as long as you're compliant federally (which you are with the $15,000 gift), there are no additional state requirements. I just went through this exact situation in California last year with a $20,000 gift from my parents for my house down payment. The only documentation I needed was the gift letter and bank statements showing the transfer, just like others have mentioned here. One tip specific to California home buyers - if you're planning to use this gift for a down payment, some of the state's first-time homebuyer programs have their own gift documentation requirements that can be slightly different from standard lender requirements. But for tax purposes, you're all set with just following federal guidelines. Keep that gift letter and your bank statements, and you'll be fine come tax time!