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 carried out when someone who has received help in the form of a financial gift wants 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 2021 tax year, the annual gift exclusion is $30,000 for a couple. For 2022, this will increase to $32,000.
- Gifts of any amount to spouses or political organizations or 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 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 all gifts over the annual threshold amount, Form 709 must be filed with the IRS.
For the 2021 tax year, the annual gift exclusion limit for a calendar year is $30,000 for a couple—twice as much as the $15,000 threshold for an individual. This increases to $32,000 in 2022 for a couple and $16,000 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 (increasing to $12.06 million in 2022).
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 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.
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.
As with all complex tax matters, it's a good idea to consult with a tax professional prior to making large gifts.
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 applicable provider in order for the tax exclusion limits to be inapplicable.
Example of Gift Splitting
As an example, consider the circumstances of Brenda and Dylan McKay. Their daughter and son-in-law 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 in 2021.
This allows their daughter and son-in-law 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.
What Is the Annual Exclusion Amount for Gifts in 2021?
The annual exclusion amount for gifts in 2021 is $15,000. This increases to $16,000 in 2022. Any amount below this is not subject to a gift tax. Amounts over this are also not subject to tax as long as they are under the lifetime limit of $11.7 million in 2021 and $12.06 million in 2022.
What Are Some Ways to Avoid a Gift Tax?
One of the ways an individual can avoid a gift tax is by spreading out the gift over a number of years. This allows an individual to stay within the gift tax limit. The gift can be provided for education or medical expenses, given directly to the educational or medical facility. This would avoid the gift tax. Married couples can also gift-split, which increases the amount that can be given without incurring the gift tax.
What Qualifies as a Gift?
Most items—such as cash, real estate, and assets—would qualify as a gift. The only items that don't qualify as a gift are those that are used for educational or medical purposes as well as gifts made to political organizations.