The IRS will zoom in with a nice hefty “Gift Tax” with penalties compounded daily from the time the gift was made.
How the Lifetime Gift Tax Exclusion Works
Don’t confuse the lifetime gift tax exclusion with the annual gift tax exclusion. They’re two separate things, although they work in tandem and interact with the federal estate tax as well.
The annual exclusion is $14,000 as of 2016. You can give away this much money or property to any one individual per year without incurring a gift tax. If you want to give gifts to two people, they can total $28,000. You can give $42,000 to three people, and so on. This exclusion was also indexed for inflation under the ATRA, so it may go up in future years.
If you give someone $20,000 in one calendar year, you have a choice to make. You can either pay the gift tax on the additional $6,000 over the annual exclusion, or you can let your lifetime exemption of $5.45 million cover it.
The Unified Tax Credit
The federal gift tax and estate tax are tied together by something called the Unified Tax Credit. The credit is one single $5.45 million exclusion. You can use it to shelter your estate from taxation when you die, or you can use it to defray the tax burden of giving more than the annual gift tax exclusion amount to any individual per year.
No. He will have to file a gift tax return. I don't know how much the mortgage he paid off was, but unless it was at least $5m, which seems unlikely, there will be no gift tax.