What Is Gift Splitting?
The term gift splitting refers to an estate planning tool that married couples can use to double their allowed annual gift tax exclusion amount. The gift tax exclusion is the amount that someone can transfer to another person as a gift without having to pay the gift tax levied by the Internal Revenue Service (IRS). Couples can use gift splitting to provide financial help to family or friends and avoid paying the gift tax. Married couples who want to take advantage of gift splitting must file joint tax returns in order to qualify.
- Gift splitting allows a married couple to gift twice as much as an individual without being subject to a gift tax.
- In order to qualify for gift splitting, couples must both agree to the gift and file joint tax returns.
- The annual gift exclusion is $32,000 and $34,000 for couples for 2022 and 2023, respectively.
- Couples whose gifts exceed the threshold must file Form 709 with the IRS.
- 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 exceeds the annual or lifetime gift exemption. Gift splitting is an easy way for married couples to maximize their annual gift tax exclusion amount. The Internal Revenue Service allows married couples who file jointly to double the amount of their gift through gift splitting.
Here's how gift splitting works. Married couples combine their individual allowances as if each contributed half the amount of the gift. The thresholds are applied to each person who is the recipient of a gift. For all gifts over the annual threshold amount, Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return must be filed with the IRS.
This means that a couple could give up to $32,000 each to any number of people without any tax consequences. Anything over the allowed $16,000 (per individual) would still not be taxable as long as it's under the lifetime gift tax limit. This limit is set at $12.06 million for the 2022 tax year and $12.92 million for 2023.
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 tax returns. The gift giver is responsible for paying any tax and filing the gift tax return, which means that recipients generally aren't required to report the gift as income.
For the 2022 tax year, the annual gift exclusion limit for a calendar year is $32,000 for a couple, which is twice as much as the $16,000 threshold for an individual. These amounts increase to $34,000 in 2023 for a couple and $17,000 for an individual.
If a couple divorces 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.
Gifts of any amount made 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.
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
Here's a hypothetical example to show how gift splitting works. Let's consider the circumstances of Mallory and River. Their daughter and son-in-law 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 to 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 $30,000. Knowing they would be subject to gift taxes on the funds if they wrote a $30,000 check, the McKays decide to gift-split. Mallory writes one check for $15,000 and River writes another for the same amount. Or they could write one check from a joint account for the total amount and still use the gift-splitting option.
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. Keep in mind that no taxes would be due if the amount is still under the lifetime gift tax amount.
Now consider the same example, but instead of a second baby, the McKays find out that their daughter is pregnant with twins. In this case, they need to add two rooms and a bathroom to their house, which means the cost will be closer to $34,000. If they split the gift again and this time Mallory writes a check for $17,000 and River writes a check for $17,000 (or a single check from a joint account for the full amount), they each must file Form 709 with the IRS. In any instance, both individuals must consent to the gift.
What Is the Annual Exclusion Amount for Gifts?
The annual exclusion amount for gifts in 2022 is $16,000. This increases to $17,000 in 2023. 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 $12.06 million in 2022 and $12.92 million in 2023.
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, 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.