Married couples can use gift-splitting to double the amount of their tax-free gifts.
Gift tax applies to U.S. citizens and residents making transfers of property by gift. Gifts in excess of the annual exclusion amount ($14,000 for 2013) to a third party, other than a qualifying charitable organization or political party, are taxable. The exclusion amount applies to each recipient separately, so the taxpayer can make multiple gifts up to $14,000 to different people without being subject to the gift tax. Married couples have an additional advantage of splitting the gift to utilize each of their individual gift tax limits.
The tax professionals at AG Tax have prepared some examples to show how useful gift-splitting can be for U.S taxpayers.
Gift-Splitting
If a married couple (both U.S. citizens) make a gift to a third party, the gift can be considered as made one-half by each spouse, even if the gift is from only one of them.
For example: A spouse may gift $25,000 to his child and, based on the current exclusion limit of $14,000, he/she would be liable to pay a gift tax on the remaining sum of $11,000. However, by including the other spouse’s exclusion amount (with their consent), the total exclusion amount available to the couple is $28,000 – thereby freeing the entire amount from gift tax.
Conditions for Gift-Splitting
• The gift must be made to a third party, not to either of the spouses.
• Both spouses must be U.S. citizens or residents while making the gift.
• Gift-splitting must have the consent of both the spouses.
• The spouses must be married at the time of the gift.
• In case of a divorce during the year the gift was made, neither spouse has remarried before the end of the tax year.
• Once a couple elects to do gift-splitting, it is applicable for all the gifting done during the year.
Gift Tax Filing Requirements
If a gift has been made that is over the threshold, a gift tax return must be filed (as discussed in our previous article – Gifts and the Gift Tax Return). If gift-splitting is being used, each spouse must file their own gift tax return. However, each spouse is required to sign as a consenting spouse on the other spouse’s return to approve the gift-splitting between them. Joint filing is not allowed by the IRS.
Effective Tax Saving
Gift-splitting may prove to be an effective way for couples to reduce gift tax and allows a couple to give away significant amounts as gifts to their loved ones.
For example: A couple can gift $56,000 tax-free to their child and his/her spouse ($14,000 from each spouse to the child and $14,000 from each spouse to their child’s spouse).
Additionally, the 2010 Tax Relief Act provides an individual an exemption of up to $5.25 million for gifting during their entire lifetime. Therefore, because of gift-splitting, a couple may claim an exemption of up to $10.5 million ($5.25 million per spouse for 2013).
However, gift-splitting can be far more complicated than taxpayers may realize. In order to make the best use of it, attention must be paid to the timing of the gift, estate tax inclusion, valuation, and generation-skipping transfer (GST) tax. It is always advisable to first consult a tax professional regarding any tax measures and/or concerns.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
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