In the U.S., residents pay a tax on large gifts known as the "gift tax." Broadly speaking, most gifts between spouses don't fall under the jurisdiction of the gift tax—spouses are free to give to one another as much as they want. However, there are some exceptions to the rule.
Keep reading to learn when the gift tax does and doesn't apply to married couples.
What Is the Gift Tax?
Before getting into the specifics of when it does and doesn't apply to married couples, it may be helpful to review the basics of the gift tax. This tax only applies to large gifts, and it's usually paid by the person giving the gift, not the person receiving it.
The Internal Revenue Service (IRS) determines the point at which the gift tax kicks in. This is known as the "annual exclusion," or the annual amount of gifts that are excluded from the gift tax. For tax year 2021, the annual exclusion is $15,000, which means you can give up to $15,000 worth of gifts to someone without having to pay any gift tax. The annual exclusion applies on a per-person basis. That means you could give up to $15,000 to as many different people as you want without incurring a gift tax. For tax year 2022, the annual gift tax exemption limit is set at $16,000 per person.
The gift tax is progressive, which means the rate increases as the size of the gift grows. The first dollar that is subject to the gift tax is taxed at a rate of 18%. Gift amounts subject to tax beyond $1 million are taxed at the top rate of 40%.
In addition to the annual exclusion, there's also a lifetime gift exclusion, otherwise known as the basic exclusion. For tax year 2021, the lifetime gift exclusion is $11.7 million while for tax year 2022 it is $12.06 million. That essentially means, for tax year 2021, you can give someone $15,000 per year as well as a once-in-your-lifetime gift of $11.7 million without paying any gift taxes.
Does the Gift Tax Apply to Married Citizens?
In general, the IRS doesn't involve itself when spouses transfer assets to and from one another. When one citizen gives a gift to their spouse who is also a citizen, it falls under the jurisdiction of the unlimited marital deduction, and it hardly ever triggers a need to pay a gift tax. This applies both during your lifetime and upon your death.
The situation gets more complicated when the marriage involves one spouse who is a citizen and another who is not. See further below for details on that scenario.
Defining a Gift's "Interest"
The IRS categorizes gifts into three categories: present interest gifts, future interest gifts, and terminable interest gifts.
A gift to your spouse qualifies for the unlimited marital deduction if they have a "present interest" in the gifted property. This means you must give the property over to them entirely for their use, enjoyment, and benefit—free from any strings attached. They take sole title to the gift if it's real or tangible property.
"Future interest" gifts are also usually covered by the unlimited marital deduction. A future interest gift is one that your spouse won't have full use and enjoyment of until some future point in time.
A "terminable interest" gift is one that can end at some future point in time due to a contingency. This is one of the few types of spousal gifts that can be subject to a gift tax. You must pay a gift tax on a gift to your citizen spouse if it's a terminable interest gift that doesn't qualify as a life estate under the power of appointment.
Consult with a tax professional if you're considering giving a gift of terminable or future interest. The rules for these exchanges are exceptionally complicated, so you'll want professional advice.
What Happens When a Spouse Isn't a Citizen?
When your spouse isn't a citizen, there's a ceiling to how much you can give without paying a gift tax. However, the annual exclusion amount for gifts specifically made to non-citizen spouses isn't the same as the annual exclusion amount for others. While you can give up to $15,000 to anyone without incurring a gift tax, you can give even more—up to $159,000 in tax year 2021—to your non-citizen spouse without incurring a gift tax.
In addition to the annual exclusion limits, couples with one non-citizen spouse are also subject to any gift taxes that would apply to two married citizens (this mostly applies to terminable interest gifts that don't qualify as a life estate under the power of appointment).
Frequently Asked Questions (FAQ)
How much can I gift my spouse tax free?
Generally for tax purposes, gifts to spouses fall under unlimited marital deduction and do not generate a gift tax liability. However, there are some circumstances where gift tax may apply. This includes "terminable interest" gifts as well as gifts made to a non-U.S. citizen spouse beyond a certain threshold.
What are tax issues when spouse is making a gift?
Typically, if the gift is being made to a spouse there may not be any gift tax consequences. Gift tax may apply in some cases pertaining to certain types of gifts or gifts to a non-U.S. citizen spouses. When spouses jointly make gifts to others, or engage in "gift splitting," they must file Form 709 with the IRS and consent to splitting the gift. While gift splitting, both spouses also need to file individual gift tax returns.
What is the lifetime gift tax exclusion for a married couple?
For tax year 2021, the lifetime gift tax exclusion for an individual is $11.7 million. For a married couple filing jointly, the joint lifetime gift tax exclusion doubles to $23.4 million.For tax year 2022, the lifetime gift tax exclusion has been raised to $12.06 million.That means a joint lifetime exemption limit of $24.12 million for married couples filing jointly in 2022.