Gift tax can apply when you give money or other assets to someone else. As the gift-giver, you’re responsible for paying any tax due. The IRS allows you to make financial gifts up to a certain exclusion limit each year before the tax kicks in. Gift-splitting rules allow married couples to combine their exclusion limit in order to make larger tax-free gifts. If you’re interested in taking advantage of this tax benefit, there are a few rules to know. You may want to work with a financial advisor who can help you plan out your estate and better understand how the gift tax might impact your situation.
Gift Tax Basics
The gift tax is a federal tax that applies to financial gifts made from one person to another. For the 2023 tax year, the gift tax ranges from 18% to 40%. As mentioned, the person who is making the gift is responsible for paying any gift tax due.
However, not all financial gifts are subject to the gift tax. That’s because the IRS allows you to make gifts up to a certain amount each year under the annual exclusion limit. For 2023, the gift tax annual exclusion limit is $17,000.
That means you can give up to $17,000 to as many people as you like without triggering the gift tax. For example, say that you have three children and you’ve opened 529 college savings accounts for each of them. You could add $17,000 to each of their accounts during the year without any gift tax consequences.
If you do have to pay the gift tax, the amount is determined by how much your gift exceeds the annual exclusion limit. The bigger the gift, the higher the gift tax rate you’re subject to.
What Is Gift Splitting?
Gift splitting is a provision in the federal tax code that allows married couples to share or “split” financial gifts in order to avoid or minimize the gift tax. Splitting gifts effectively allows couples to double the gift tax annual exclusion limit.
Going back to the previous example, say that you’re married. If you and your spouse agree to split gifts, you could now deposit up to $34,000 into each of your children’s 529 savings accounts for the year without having to worry about the gift tax.
Splitting gifts allows you to avoid potential tax consequences when one of you makes a larger gift than the other to the same individual. When you split gifts, the IRS looks at the totality of those gifts to determine whether gift tax applies, rather than which each spouse contributed. Gifts are considered to be made equally by both spouses.
Gift Splitting Example
Let’s dig a little deeper into how gift splitting works. Once again, let’s assume that you and your spouse want to gift each of your three children money. The funds will go into three different college savings accounts, one for each of them.
Under the gift-splitting rule, you can contribute up to $34,000 to each account together. However, you’re planning to deposit $20,000 to each account while your spouse will be contributing $14,000 to each account.
If you were to make those gifts separately, the entirety of your spouse’s gift would fall within the annual exclusion limit for the gift tax. However, $3,000 of your gift to each child would be above the limit. Those amounts would be subject to the gift tax. If you agree to split the gifts, however, you could sidestep that tax bill.
Gift Splitting Rules
The IRS allows married couples to split gifts, with a few stipulations.
- Couples must be legally married under state law.
- Spouses must be U.S. citizens or permanent residents.
- Both spouses must give their consent to split gifts.
- The combined amount of the gift cannot exceed the annual gift tax exclusion limit.
- Gifts must be split in the year that they’re made.
There’s one more thing to know about gift splitting: you may not owe any gift tax even if your gifts exceed the annual exclusion limit. That’s because the IRS allows you to exempt a certain amount of wealth from estate tax each year.
For 2023, the estate tax exemption is $12.92 million per individual or $25.84 million for married couples. Gifts over the annual exclusion limit can reduce your lifetime estate tax exemption. However, you’d only have to pay gift tax if your gifts reduce your estate tax exemption limit to zero. That means that unless you’re making substantial gifts of wealth your odds of having to pay the gift tax are typically low.
How to Split Gifts on a Tax Return
If you’re planning to split gifts with your spouse, you’ll need to report it to the IRS. Gift splitting is reported using Form 709.
Here are the most important lines on the form for gift splitting:
- Line 12: You’d check ‘Yes’ here to give your consent to have any gifts made by either of you treated as being given by both of you.
- Line 13: The name of the consenting spouse goes here.
- Line 14: Here, you’d enter the consenting spouse’s Social Security number.
- Line 15: On this line, you’ll check ‘Yes’ or ‘No’ to indicate whether you were married for the entire year.
- Line 18: This line reinforces the consent of the other spouse to have gifts split. The consenting spouse’s signature and the date are required here.
If you’re not sure how to report split gifts on a tax return, talking to a tax professional can help you figure out what information you need to include.
You may also want to talk to your financial advisor about the pros and cons of gift splitting and how gifting money to others factors into your estate plan. Your advisor can assess your financial situation and help you find the right solutions for passing on wealth, both during your lifetime and after you’ve passed away.
The Bottom Line
Gift splitting can provide an important tax benefit for married couples who wish to give part of their wealth to others. If you’re married and considering splitting gifts, it’s helpful to understand the rules first so that you don’t risk running afoul of the IRS. A financial expert can help apply the rule to your personal situation.
Estate Planning Tips
- Consider talking to your financial advisor about the best ways to make financial gifts and how to do so with minimal gift or estate tax consequences. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While you could make financial gifts directly, you might consider other ways to transfer wealth. For example, establishing a trust could give you a measure of control over when and how your heirs receive their inheritance. You could leave money to your children, for instance, but specify that they need to reach a certain age or graduate college before they’re allowed to access it. Your financial advisor can walk you through the different types of trusts to help you decide if creating one makes sense for your situation.
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