What is Gift Split, should I Gift Split, and when should I Gift Split?
What is considered a gift?
Before deciding to gift split, understanding what qualifies as a gift is essential. Gifts can include money, real estate, antiques, other items, and other assets. It is important to remember that only gifts of present interest qualify for the gift tax exclusion. To be considered a present interest gift, the donor must have all immediate rights to use, possess, and enjoy the property (real estate, boat, tractor, etc.) or income gifted. Items that typically do not qualify as gifts are items used for education or medical purposes and gifts made to political organizations.
Gift Tax Exclusion
The gift tax exclusion for 2023 is $17,000.
The gift tax exclusion for 2024 will be $18,000.
For example, if you give your cousin $20,000 in cash, you can exclude $17,000 from being subject to the gift tax.
However, if you put $20,000 into a trust for your cousin, then all of that gift is subject to gift tax because that is a gift of future interest.
You can use that exclusion once for every donee you gift for the year. This means that if you make multiple gifts to your brother, you can still only exclude $17,000 for the year for all gifts given to your brother. However, if you gift $15,000 to your mother in the same year, you can exclude it as it is below the exclusion and the only gift made to your mother for that year.
What is gift splitting?
By splitting gifts, married couples can double their gift tax annual exclusion, meaning they can now make gifts up to $34,000 without paying gift tax. This number increases yearly as the annual gift tax exclusion does. The gift-splitting annual number is double whatever the gift tax exclusion is for the current year. It is important to remember that only legally married couples may elect to gift split. Those filing as individuals may not gift-split.
For example, You and your spouse give gifts to your children. Your total gift amount is $20,000. Your spouse's total gifts are $14,000.
Without splitting gifts, your spouse's contribution is wholly excluded as it falls under the annual exclusion. However, the $3,000 of your gift above the annual exclusion ($17,000) is subject to gift tax. If you elected to split gifts for the year, then each spouse is deemed to make an equal gift, and you could exclude all $34,000 and not pay gift tax. Once you make an election to split gifts, you must split ALL gifts to third parties for the year. You must file a form 709 if you choose the gift-splitting option. The filing date for form 709 is April 15th, plus extensions. If you file a form 709 for gift splits, your spouse must also sign to give consent to split gifts on line 12.
A common way that people avoid gift tax is by spreading out their gifts over several years. By doing this, they can stay below the gift tax exclusion. If a married couple elects to split gifts, they can double that exclusion for all gifts during the calendar year. This increases the amount that can be given over a number of years without incurring gift tax.
Why would I gift split?
Many people like to do their gifting while they are alive instead of having it come from their estate. There are multiple reasons for this. One of the main reasons for giving to loved ones while you are alive is that it allows you to see them enjoy the money or gift that you gifted. You can see them reach a goal sooner because of your gift and witness the blessing you were able to have on their life. This joy from gifting cannot be experienced if all your gifts come from your estate (after you pass). The second reason is that it allows you to lower your taxable estate so that more money goes to your heirs instead of the government. It is always important to ensure you are financially secure before executing lifetime gifts.
Gift splitting can be advantageous for married couples who wish to give a portion of their wealth to others. However, many rules come along with gift splitting. If you think gift splitting would benefit you, it is essential to talk to your financial advisor, who will be able to personalize this tactic for your situation.