Gift splitting allows couples to double the value of their annual gift-tax exclusion limit when giving money to someone else. The IRS extends this benefit to married couples who file joint tax returns.
Splitting gifts can work in your favor if it means avoiding gift tax. The gift tax is a tax on the transfer of property or assets from one person to another. If you're married and plan to make financial gifts to someone else, it's important to understand how to take advantage of the gift-splitting rule.
Definition and Examples of Gift Splitting
Gift splitting allows a married couple to share gifts made by each for federal gift-tax purposes. The federal gift tax applies when one person makes financial gifts to another without expecting to receive something in return. This can include gifts of money or property, as well as an interest-free loan. The donor or person making the gift is responsible for paying any gift tax owed on it.
The IRS requires taxpayers to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for gifts that are made in excess of the annual gift-tax exclusion limit. For 2021, that limit is $15,000 per person for single filers. So, for example, a single parent may give their child $15,000 to buy a car without triggering the gift tax.
The gift-splitting rule allows a married couple who files a joint return to double their annual gift-tax exclusion limit. So that means couples are able to split gifts of up to $30,000 without having to pay gift tax on them, under current limits.
Here's an example of how gift splitting works. Say you and your spouse want to help your child buy a home. Assuming you file a joint tax return, you could, without incurring gift tax, give the child up to $30,000 to put toward a down payment or other costs.
Gifts to a spouse, gifts to a political organization for its use, and payments of tuition or medical expenses on behalf of someone else are not considered to be taxable gifts.
How Gift Splitting Works
The IRS applies the annual gift-tax exclusion limit individually, on a per-gift, per-recipient basis. So for 2021, a single tax filer could gift up to $15,000 per person to an unlimited number of people without having to pay the gift tax.
When couples split gifts, they're doubling the annual gift-tax exclusion limit that applies to gifts collectively. Let's revisit the example of gifting $30,000 to your child to buy a home.
If you were not splitting gifts, you and your spouse could each give your child up to $15,000 toward the home without triggering the gift tax. But what if one of you has more in savings than the other?
Let's assume you give them $10,000 from your savings account. This puts you below the individual annual gift-tax exclusion limit of $15,000. Your spouse, on the other hand, gives them $20,000 from personal savings to put toward a home.
Ordinarily, your spouse would be subject to gift tax for the extra $5,000 over the $15,000 annual exclusion limit. But if you combine your gifts with gift splitting, you can gift the full $30,000 without any tax penalty.
Couples can apply the gift-splitting rule across gifts to multiple people. So if you have three kids, you could gift each one of them $30,000 without paying gift tax, as long as you're splitting gifts.
Again, you have to file the correct tax form to split gifts, even if the gift tax isn't payable. When completing Form 709, you and your spouse must both give consent to split financial gifts on Line 12. If your spouse doesn't give their consent and sign the form with you, then the gift can't be split.
If you're gifting property rather than money, the IRS may ask for copies of appraisals or transfer-of-title documents to verify the gift.
Do I Need To Pay Gift Tax?
The IRS requires you to file Form 709 to report financial gifts when certain conditions are met. Generally, you're required to file a gift-tax return if:
- You made gifts to at least one other person (besides your spouse) that exceed the annual exclusion limit for the year.
- You and your spouse are splitting all gifts made by each other during the calendar year.
- You gave someone (other than a spouse) a gift of a future interest that they cannot actually possess, enjoy, or receive income from until some time in the future.
- You gave your spouse an interest in property that will end by some future event.
Gift tax is applied at the same rates as estate tax, maxing out at 40% for 2021.
Whether you actually need to pay gift tax would depend on whether you've exceeded your lifetime gift-tax exclusion limit. For 2021, the limit is $11.7 million for individuals, doubling to $23.4 million for married couples filing a joint return. So you'd still need to file Form 709 if any of the above conditions apply, but you're not necessarily going to have to pay gift tax, based on how much of a cap you have left under the lifetime exclusion limit.
- Gift splitting can help to avoid having to pay gift tax on financial gifts to family members or friends.
- Gift tax applies to the transfer of property or other financial gifts from one person to another.
- The annual gift-tax exclusion limit can be doubled for married couples who file joint returns and choose to split gifts.
- If you choose to split gifts with your spouse, you'll need to file Form 709 with the IRS to report the gift.
- Whether gifts are taxable is determined by how much of your lifetime gift-tax exclusion limit you've used.