Describe gift-splitting
Gift splitting is an estate planning instrument that allows married couples to double their yearly gift tax exclusion. Gift tax exclusion refers to the amount that can be gifted without incurring the Internal Revenue Service’s (IRS) gift tax, and gift splitting lets couples aid relatives and friends without paying gift tax. To qualify for gift splitting, married couples must file joint taxes.
How Gift Splitting Works
If the giver exceeds the yearly or lifetime gift exemption, they must pay gift tax. Married couples can easily enhance their yearly gift tax exclusion by gift splitting. The Internal Revenue Service permits married couples filing jointly to double their gifts through gift splitting.
How gift splitting works: Married couples share allowances as if each supplied half the gift. The thresholds apply to each gift recipient. The IRS requires Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return for gifts above the yearly threshold.
Each spouse might contribute up to $34,000 to any number of people in 2023 without tax penalties. Anything above $17,000 per person is tax-free if it’s within the $12.92 million lifetime gift tax maximum for 2023.
The IRS requires both spouses to agree to the gift and describe the situation when submitting tax returns to qualify for gift splitting. The gift sender pays taxes and files the gift tax return, so recipients aren’t obligated to record the gift as income.
In 2023, a couple’s yearly gift exclusion limit is $34,000, double the individual maximum of $17,000.
Special Considerations
Once a couple divorces before paying taxes for the year of the gift, neither spouse can remarry to qualify for gift splitting. Furthermore, the donation must be provided to a third party, and neither spouse can benefit from it.
Giving to spouses and political groups and paying tuition and medical expenses for others are often not taxed as gifts. The tax exclusion restrictions do not apply to gifts given directly to hospitals, schools, or other providers for medical or educational purposes.
As with all complex tax concerns, consult a tax professional before making substantial contributions.
Sample Gift Splitting
To demonstrate gift splitting, consider this hypothetical case. Consider Mallory and River’s situation. Their daughter and son-in-law learned they were having another. Their present house is too tiny and requires an expansion to suit their increasing family. The McKays are excited to become grandparents again and happy to contribute to the addition.
They estimate the extra room will cost $30,000. The McKays choose to gift-split rather than write a $30,000 check to avoid gift taxes. Mallory writes $15,000, and River writes the same. Consider writing a single check from a joint account for the complete amount and using the gift-splitting option.
This enables their daughter and son-in-law to finish the makeover without a loan. The McKays can avoid gift tax by splitting the gift, but they must file Form 709 with the IRS. Remember that no taxes are required if the amount is below the lifetime gift tax.
Instead of a second child, the McKays learn their daughter is pregnant with twins. If they add two rooms and a bathroom to their property, the cost will be around $34,000. If they divide the gift again and Mallory writes a check for $17,000 and River writes a check for $17,000 (or a joint account check for the whole amount), they must submit Form 709 with the IRS. Both parties must always agree to the gift.
How Much Is the Annual Gift Exclusion?
The 2023 gift exclusion is $17,000. Any sum below this is gift-tax-free. Under the $12.92 million lifetime cap in 2023, amounts beyond this are tax-free.
What are gift tax avoidance methods?
An individual can avoid gift taxes by spreading the gift over several years. An individual can keep gifts within the gift tax limit. Directly giving to an educational or medical establishment helps cover costs. This avoids gift tax. Gift-splitting allows married couples to contribute more without gift tax.
What’s a gift?
Most assets, cash, and real estate are gifts. Educational, medical, and political gifts are the only non-gifts.
Bottom Line
Taxpayers can distribute money or assets to others without paying taxes if the value doesn’t reach a specified threshold. Splitting presents avoids gift taxes for couples. If you’re married and split the gift, file Form 709, the gift tax return.
Conclusion
- Gift splitting lets married couples give twice as much as individuals without gift taxes.
- Couples must agree and file joint tax returns to share gifts.
- The 2023 couple gift exclusion is $34,000.
- If they divide gifts or give more than the threshold, they must complete Form 709.
- Giving money to spouses, political groups, or others to pay tuition and medical bills is usually tax-free.
