Gift splitting is an innovative estate planning technique that provides married couples with an effective means to double their annual gift tax exclusion amount. This strategy is an essential tool for couples looking to offer financial support to family or friends while avoiding potential gift tax liabilities imposed by the Internal Revenue Service (IRS).
Understanding the Gift Tax Exclusion
The IRS allows individuals to transfer gifts without being subject to gift tax up to a certain threshold. For 2023, the annual gift exclusion for couples is set at $36,000, allowing each spouse to gift up to $18,000 to any recipient without the risk of incurring a gift tax. In simpler terms, gift splitting enables a married couple to combine their gifting capacities, thereby maximizing their potential to give away valuables without tax implications.
Key Takeaways
- Gift splitting effectively allows couples to gift double the amount that an individual can give without being taxed.
- Spouses must agree to the gift and file joint tax returns to qualify for gift splitting.
- For the tax year of 2023, couples can gift a total of $36,000 without triggering a gift tax.
- Any gifts made over the annual exclusion must be reported via IRS Form 709.
- Certain gifts may be exempt from gift tax, such as gifts to spouses, political organizations, and payments for medical or educational expenses made directly to institutions.
How Gift Splitting Works
When married couples opt to gift split, they essentially treat their individual gift allowances as a collective sum. The IRS permits the combinational approach where each spouse contributes half of the total gift, which can be advantageous for large financial gifts.
To illustrate, here's how gift splitting operates in practice: - If a couple wants to give $36,000 to their grandchild, each parent can provide $18,000 (which collectively amounts to the allowed limit of $36,000). If either spouse gives a gift exceeding this amount, they must file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report their gifts.
Special Conditions for Gift Splitting
For gift splitting to be recognized by the IRS, both spouses must mutually consent to the gift. Additionally, it is essential to note that if a couple gets divorced before the tax filing deadline for the year the gift was made, they will lose the ability to split the gift amount unless they are remarried.
Another condition is that neither spouse can receive benefits from the gift. The gift must be made to a third party, thereby reinforcing its purpose of benefiting someone else rather than enhancing the financial circumstances of the gift givers.
Non-Taxable Gifts
Certain gifts, such as funds given directly toward educational tuition costs or medical expenses, do not fall under the taxable category as gifts. In these scenarios, payments must be made directly to the institution providing the service—instead of giving the money to the intended recipient.
Example Scenario of Gift Splitting
Let’s consider an example involving a married couple, Mallory and River McKay. They are thrilled about their daughter expecting a second child and want to support her family financially. They decide to use gift splitting to help fund a $30,000 addition to their daughter’s home.
- Gift Splitting in Action: Mallory writes one check for $15,000, while River writes another check for $15,000, totaling $30,000. Or, alternatively, they could issue a single check from their joint account for the same amount, keeping clear records to ensure that they can file Form 709 appropriately.
Now imagine the scenario has changed and their daughter is pregnant with twins, printing the necessary addition costs to $34,000. Mallory could give $17,000, and River could match with another $17,000, which would still comply with the tax rules as gift splitting allows for such splitting.
Current Year Limits and Gift Tax Avoidance
The annually permitted exclusion amount for gifts in 2024 is $18,000 per individual, totaling $36,000 for married couples. Gifts above this amount are still free from taxation if they fall beneath the lifetime exemption of $13.61 million for individuals (also for 2024).
Some strategies to avoid gift tax include: 1. Spread out gifts over multiple years to stay within annual limits. 2. Direct payments toward medical or educational expenses to the institution. 3. Married couples utilizing gift splitting to maximize permissible limits.
Conclusion
In conclusion, understanding and effectively utilizing gift splitting can provide significant financial flexibility for married couples looking to give. With a strategic approach, couples can potentially assist family members and loved ones without incurring unwelcome tax complexities. Always consider consulting with a tax professional before making substantial gifts or filing tax returns to ensure compliance with current tax laws.