What Is Gift Splitting?
Gift splitting is a rule of taxation that allows married couples to split the value of a gift between them to double their allowed gift tax exclusion amount. This is usually something done when helping someone out, when a large sum of money changes hands and they involved parties want to avoid an IRS tax.
Understanding Gift Splitting
Gift splitting is an easy way for married couples to maximize their gift tax exclusion amount on large sum gifts. To qualify as gift splitting, both spouses must agree to the gift beforehand, and both must make the election on their tax returns when they file.
If the couple has divorced prior to filing their taxes for the year the gift took place, neither spouse may be remarried. Neither spouse can benefit from the gift; it must be made to a third party.
In 2018, the gift tax exemption was increased to an annual amount of $15,000 per individual gift, meaning that a couple practicing gift splitting could gift up to $30,000 to a third party before being taxed on the amount.
Two Examples 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 their second child. Unfortunately, the house they currently live in is too small, and they need to build an addition onto the property to accommodate the needs of their growing family. The McKay’s 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. The McKay’s, knowing they would be subject to gift taxes on the funds if they wrote a $21,000 check, decide to gift split. Brenda writes one check for $10,500 and Dylan writes another for the same amount.
As with all tax matters, consult with a tax professional prior to making large gifts or deductions.
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 McKay’s to avoid paying gift taxes by each keeping their individual gift amount under the $15,000 limit. If they had not known about the benefits of gift splitting, and instead had written a joint check in the full lump sum, they would have been taxed on $6,000 from the gift.
Now consider the same example, but instead of a second baby, the McKay’s 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, but this time Brenda writes a check for $16,000 and Dylan writes a check for $16,000 they are each only taxed on $1,000 of their individual gift funds. If they had instead written a joint check for the full lump sum, they would have been taxed on $11,800 of the $32,000 gift.