Definition
Gift splitting is a financial strategy used by married couples to reduce their gift tax liability. It allows a couple to share the gift tax exclusion, meaning, both individuals can take advantage of their annual gift tax exclusions thereby doubling the original exclusion amount. This can be beneficial when large gifts exceeding the annual exclusion limit are being made to a single recipient within a year.
Phonetic
The phonetics of the keyword: “Gift Splitting” is:Gift: /ɡɪft/ Splitting: /ˈsplɪtɪŋ/
Key Takeaways
- Sharing the burden: Gift splitting allows a married couple to share the burden of a gift tax. Under U.S. federal law, each person can give away a certain amount each year or over their lifetime before being subject to gift tax. By splitting a gift, both spouses count the gift towards their individual limits.
- Joint consent required: Both spouses must agree to split a gift. This means both must sign an agreement, usually filed with their annual tax returns, indicating that they both understand and agree that the gift will be treated as though it was given half by each of them.
- Limitations: Not all gifts can be split. Only gifts to a third person (other than your spouse) can be split. Gifts to a spouse, or gifts from one spouse to another, are not eligible for gift splitting.
Importance
Gift splitting is an important concept in finance and business, especially in relation to tax planning. It is a provision under U.S. tax law that allows a married couple to split a gift’s total value between them when they gift to another person, essentially doubling the amount they can give without encountering the gift tax. As each individual can give up to the annual gift tax exclusion amount without being taxed, when a married couple utilises gift splitting, they can give twice that amount tax-free. This strategy can significantly reduce a couple’s taxable estate, establishing an effective tool for estate planning, and fostering wealth transfer to next generations in a tax-efficient manner.
Explanation
The purpose of gift splitting is to leverage the federal annual gift tax exclusion in the United States, which allows individuals to gift a certain amount of assets or money tax-free each year. The splitting of gifts can effectively double this exclusion amount when the gifts are given by a married couple. This strategy enables wealthier couples to transfer a larger portion of their estate to their heirs without incurring the gift tax, thereby reducing their prospective estate taxes.In the context of usage, consider a situation where grandparents want to gift money to their grandchildren. Instead of each grandparent gifting the maximum allowable amount separately, they combine their gifts into one larger tax-free amount – a practice known as splitting gifts. This way, they can potentially pass on a substantial amount of their wealth tax-free. This strategy can be beneficial in estate planning, especially for high net worth individuals or couples.
Examples
Gift splitting is a financial provision in the United States that allows a married couple to split a gift’s value between the two of them for the purposes of gift tax, effectively increasing their gift tax exclusion amount. Here are three real-world scenarios that illustrate the principle:1. Wedding Gift: John and Sarah, a married couple, want to give a substantial wedding gift to their friend’s daughter. They decide to give $30,000. Instead of this gift being attributed to just one of them, they elect to utilize gift splitting. As a result, the IRS views the gift as $15,000 from John and $15,000 from Sarah. Therefore, they can exclude the entire amount from their gift tax because it falls within their individual annual exclusion limit ($15,000 per person for the tax year 2022).2. College Tuition Assistance: Suppose a married couple wants to help their niece cover her college tuition costs, amounting to $44,000. They can use the provision of gift splitting to split the gift equally, each being responsible for $22,000. This way, the allocated amounts are within the IRS annual exclusion limit and will not trigger the gift tax.3. Passing on Family Heirlooms: A couple decides to pass on a family heirloom, the family house, worth $1 million as a gift to their child. The couple can take advantage of the lifetime gift tax exemption ($11.7 million for the individual for the tax year 2021) and split this gift, with each spouse using $500,000 of their lifetime gift tax exemption. They will report the gift split on their gift tax return, but they won’t owe any gift tax because the split gift is within their individual lifetime exemption amounts. Remember, gift splitting requires both spouses to be US citizens and to indicate their consent to split the gift on their federal gift tax return (Form 709), even if no tax is payable. If in doubt, consult with a tax professional or financial advisor.
Frequently Asked Questions(FAQ)
What is gift splitting?
Gift splitting is a taxation rule that permits married couples to share the gift-giving tax exemption amounts for a single financial year. This allows them to effectively double the amount they can give to others without incurring gift tax.
How does gift splitting work?
Generally, gift splitting allows a couple to divide the value of a gift between them, essentially attributing half the gift’s value to each spouse. By doing this, they can use two individual annual exclusions to give away more wealth free of gift tax.
Is there a limit on the amount that can be split while gifting?
Yes, each spouse is eligible for an annual gift tax exclusion. For 2022, this exclusion is $16,000 per recipient. Thus, a couple utilizing gift splitting could gift up to $32,000 to a single recipient without incurring gift tax.
Can all married couples employ gift splitting?
Gift splitting is only available to married couples where both individuals are U.S. citizens. If one spouse is not a U.S citizen, they are not eligible for gift splitting.
Do I need to file anything to use gift splitting?
When using gift splitting, you must file a gift tax return, also known as IRS Form 709, even if no tax is due. This notifies the IRS that both spouses agree to split the gifts during that year.
Are there any potential drawbacks to gift splitting?
While gift splitting can be a useful tool for tax planning, it can also use up your lifetime gift and estate tax exclusion. You should consult with a tax advisor or financial planner to ensure that gift splitting aligns with your overall fiscal strategy.
Can gift splitting be applied to previous years?
No, gift splitting cannot be retroactively applied. Both spouses must agree and elect to split the gifts during the specific tax year in which the gifts were made.
Are charity gifts eligible for gift splitting?
Charitable gifts are generally not subject to gift tax, thereby typically not requiring gift splitting. However, it’s important to consult with a tax professional for details specific to your situation.
Related Finance Terms
- Unified Credit
- Annual Exclusion
- Gift Tax Return (Form 709)
- Estate Tax
- Lifetime Gift Tax Exemption
Sources for More Information
