What Is Gift Splitting?
Gift splitting allows married couples to split the value of a gift between them to double their allowed annual gift tax exclusion amount. This is usually something done when helping someone out with a financial gift and the involved parties want to avoid the gift tax levied by the IRS.
- Gift splitting allows a married couple to gift twice as much as an individual without being subject to a gift tax.
- For the 2020 and 2021 tax years, the annual gift exclusion is $30,000 for a couple.
- Gifts of any amount to spouses or political organizations, and to pay tuition and medical expenses on behalf of others, are generally not taxable as gifts.
How Gift Splitting Works
Gifts of money or property are subject to a gift tax if the donor or donors has exceeded the annual or lifetime gift exemption. Gift splitting is an easy way for married couples to maximize their annual gift tax exclusion amount. The IRS allows married couples who file together to double the amount of their gift through gift splitting.
For the 2020 and 2021 tax years, the annual gift exclusion limit in a calendar year is $30,000 for a couple—twice as much as the $15,000 threshold for an individual. Married couples combine their individual allowances as if each contributed half of the amount. The thresholds are applied to each person who is the recipient of a gift—meaning a couple could give up to $30,000 each to any number of people without tax consequences. Anything over the $15,000 (per individual), however, would still not be taxable as long as it's under the lifetime gift tax limit of $11.7 million in 2021. Although Form 709 must still be filed with the IRS for gifts over the $15,000 (or $30,000 for couples).
If you receive a gift, you generally aren't required to report it as income. The gift giver is responsible for paying any tax and filing a gift tax return.
To qualify for gift splitting in the eyes of the IRS, both spouses must agree to the gift and specify the situation in which the gift was given when filing their taxes.
If a couple has divorced prior to filing their taxes for the year the gift took place, neither spouse can be remarried for gift splitting to qualify. In addition, neither spouse can benefit from the gift and it must be made to a third party.
Also, gifts of any amount to spouses or political organizations, and payments of tuition and medical expenses on behalf of others, are generally not taxable as gifts. For gifts used for medical or educational expenses, the gifts must be paid directly to the hospital, school, or other provider in order for the tax exclusion limits to be inapplicable.
As with all complex tax matters, it's a good idea to consult with a tax professional prior to making large gifts.
Example of Gift Splitting
As an example, consider the circumstances of Brenda and Dylan McKay. Their daughter and her husband have recently found out that they are expecting a second child. The house where they currently live is too small, and they need to build an addition onto the property to accommodate the needs of their growing family. The McKays are thrilled by the prospect of becoming grandparents again and are eager to contribute to the cost of the addition.
They expect that the additional room will cost around $21,000. Knowing they would be subject to gift taxes on the funds if they wrote a $21,000 check, the McKays decide to gift-split. Brenda writes one check for $10,500 and Dylan writes another for the same amount.
This allows their daughter and her husband to complete the remodel without having to worry about taking out a loan to do so, and it allows the McKays to avoid filing a Form 709 with the IRS (although no taxes would be due if the amount is still under the lifetime gift tax amount of $11.7 million).
Now consider the same example but, instead of a second baby, the McKays find out that their daughter is pregnant with twins. Now they will need to add two rooms and a bathroom onto their house and the cost will be closer to $32,000. If they split the gift again and this time Brenda writes a check for $16,000 and Dylan writes a check for $16,000, they each must file Form 709 with the IRS.