Maximize Your Gifting: Understanding Gift Splitting for Married Couples
Gift splitting is an advantageous estate planning strategy that allows married couples to double their allowed annual gift tax exclusion amount. This can help them provide significant financial assistance to family and friends without incurring the tax levied by the Internal Revenue Service (IRS). By utilizing gift splitting, couples can make larger, tax-free gifts each year by filing joint tax returns.
Key Takeaways
- Gift splitting enables married couples to gift twice as much as an individual without being subject to gift tax.
- To qualify, both spouses must agree to the gift and file joint tax returns.
- For 2023, the annual gift exclusion is set at $34,000 for couples.
- A couple must file Form 709 if they decide to use the gift-splitting option or if their gift exceeds the specified threshold.
- Certain gifts, such as those made to spouses, political organizations, or for tuition and medical expenses, are usually not taxable.
How Gift Splitting Works
Gifts of money or property are taxable if they exceed the annual or lifetime gift exemption. Gift splitting lets married couples combine their individual gift allowances, thereby maximizing their annual gift tax exclusion. The IRS permits couples who file jointly to double the amount of their gift exclusion through this strategy.
Here’s how it works: married couples combine their individual gift allowances, effectively allowing them to give larger gifts as if each contributed half the amount. For gifts over the annual exclusion, Form 709 must be filed with the IRS.
For instance, a couple could give up to $36,000 each to any number of recipients in 2024 without tax repercussions. Anything above the $18,000 per person limit is still tax-free as long as it doesn’t surpass the $13.61 million lifetime gift tax limit for 2024.
Both spouses must mutually agree to the gift and specify the circumstances when filing their tax returns to qualify for gift splitting. The donor is responsible for paying any tax and filing Form 709. Generally, recipients are not required to report the gift as income.
Special Considerations
If a couple divorces before filing their taxes for the year the gift was given, they must not remarry for gift splitting to qualify. Neither spouse should benefit from the gift, and it must be made to a third party.
Gifts to spouses or political organizations and payments made for others’ tuition or medical expenses are generally not subjected to gift tax, provided they are made directly to the service provider.
Consulting a tax professional before making significant gifts is revisable given the complexity of tax regulations.
Example of Gift Splitting
Consider the case of Mallory and River who want to assist their daughter and son-in-law in building an addition to their home. Expecting the addition to cost $30,000, Mallory writes a $15,000 check and River writes another $15,000 check, or they both contribute to a $30,000 check from a joint account while using the gift-splitting option, thereby avoiding the gift tax but must file Form 709.
In another scenario, if the construction cost is $34,000 to accommodate twins, Mallory and River could each write a $17,000 check. Here again, they need to file Form 709 but avoid gift tax consequences, given the amount remains under the lifetime gift tax limit.
Frequently Asked Questions (FAQs)
What Is the Annual Exclusion Amount for Gifts?
The annual exclusion amount for gifts in 2024 is $18,000. Gifts below this threshold are not subject to gift tax. Amounts exceeding this remain untaxed as long as they stay under the $13.61 million lifetime limit.
What Are Some Ways to Avoid a Gift Tax?
Individuals can avoid gift tax by spreading the gift over several years to remain within the annual exclusion limit. Gifts outside this may avoid taxes if used directly for educational or medical expenses or through gift splitting for married couples.
What Qualifies As a Gift?
Most assets such as cash, real estate, and property qualify as gifts. Exclusions include items for educational or medical purposes and gifts to political organizations.
The Bottom Line
Taxpayers can give others gift money or assets tax-free as long as the gift doesn’t exceed a specific amount. Married couples can maximize their gifts using gift splitting and avoid paying gift tax by filing Form 709. For further regulations, consult a tax professional.
Related Terms: annual gift tax exclusion, Form 709, lifetime gift tax limit, estate planning, tax returns.
References
- Internal Revenue Service. “Instructions for Form 709”, Pages 2-4.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
- Internal Revenue Service. “Instructions for Form 709”, Page 7.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Select Who Pays the Gift Tax?
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Select What Can Be Excluded From Gifts?
- Internal Revenue Service. “Instructions for Form 709”, Pages 2-3.
- Internal Revenue Service. “Instructions for Form 709”, Page 2.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Select What Is Considered a Gift?
