Gift Splitting Explained: An Overview, Tax Rules, and Examples
Giving financial gifts to a loved one can be an impactful gesture that sets them up for financial freedom in the years to come. However, it’s crucial to know the limits around how much you can give in a year without drawing the IRS’s attention and unwelcome taxes. Understanding gift splitting rules can help you make larger gifts without incurring some of the tax penalties with the IRS.
If you and your spouse want to start giving more generously, here’s what you should know upfront about gift splitting.
What to Know About the Gift Tax
If you are thinking about giving a financial gift to a loved one, be aware that you might be on the hook for paying taxes on that gift. This federal tax applies to all gifts made from you to someone else, but the tax rate may vary depending on how much you want to give.
It will range from 18 to 40 percent based on the chart below:
If you are going to be giving a gift, you need to fill out the IRS Form 709 for your gift tax at the end of the year. This will allow you to see any special eligibility items that can help you minimize gift taxes.
Gift Tax Annual Exclusion Limit
Of course, not all gifts are going to trigger the gift tax that can substantially eat into the financial benefit you were hoping to give to a loved one. There is a generous maximum that you can give each year without having to report to the IRS on a separate tax return, provided you follow the rules.
In 2024, the limit is $18,000 (it was $17,000 in 2023). It’s important to note that these limits are per recipient and per donor. An individual with three children could gift $18,000 to each one without paying taxes on those gifts - as could their spouse, raising the total gift per child to $36,000 for 2024.
There is also a lifetime gift tax exclusion that can minimize your tax payments. In 2024, you can give up to $13.61 million on your lifetime exclusion. Unlike the annual exclusion limit, this amount is tied to you (the gift-giver), rather than per recipient.
You will use your annual exclusion to mark off the gift for the year but will have to claim the remainder on a gift tax return. Every dollar over the annual exclusion limit counts toward your lifetime exclusion.
What is Gift Splitting?
Gift splitting is a great way to maximize your giving at the end of each year – if you are part of a married couple. Instead of being limited to the $18,000 limit for 2024, you can essentially double that amount by splitting gifts. In other words, you can give away the maximum exclusion limit and so can your spouse.
This means you can give up to $36,000 annually to each person without triggering the gift tax on your contributions.
Benefits of Gift Splitting
Gift splitting is a great way to maximize your giving to loved ones and support them financially with a sizable gift. Couples can sit down and figure out who they want to support this year, and it can be anyone from a child to a parent.
Not only does it help you to give twice the amount to an individual, but it also comes with tax advantages like transferring wealth to minimize your taxable estate. The gifts you give now can pare down your estate, triggering less of a tax burden for your loved ones upon your passing. This saves your hard-earned money.
Gift splitting also allows you to see the benefit of that financial support in the here and now. The recipient can enjoy it now if you help them buy a car or serve as the down payment on a house. Some financially savvy parents set up their children for future success by funding 529 college savings plans with the annual exclusion limit.
Gift Splitting Example
Suppose that you want to help your brother buy a new home, but he does not have any money saved for the down payment on a new property. He estimates that he will need $30,000 upfront before he can buy the house.. You and your spouse have the funds available to help set him up for success, so you cut him a check for $30,000.
Normally, your gift would be subject to that $18,000 limit, but you and your spouse decide to split the gift. You gift $15,000, and your spouse gifts $15,000. This means you can give him up to $30,000 without triggering that annual tax as long as you follow all required gift splitting rules.
In this gift splitting example, you and your spouse can provide the full amount and avoid the gift tax for the year.
You can do the same thing by contributing to a child’s college savings account each year. If you want to set them up for success and give them an account that will cover their tuition in full in the years to come, you can split the gifts and contribute up to $36,000 annually to each child.
Gift Splitting Rules
Keep in mind that the only viable way to split gifts is if you are legally married for the entire year (which will be asked on line 15 of the form). You must both be United States citizens and you both have to give consent to split the gift.
If you intend to split a gift in 2024, you will need to check the box on line 12 that states you have made split gifts and list your spouse’s name on line 13, their social security number on line 14, and their signature on line 18.
If you struggle to fill out this form, it might be worthwhile to have a tax professional go over your return before you file.
Get Help from Consilio Wealth Advisors
You’ve worked too hard to let money steal your financial freedom, and the right money moves can help you make the most of your generous gifts to loved ones. Understanding the rules when it comes to gift splitting can help you win the tax game for years to come.
Consilio Wealth Advisors can answer all of your questions regarding wealth planning and splitting gifts in the coming year. As fiduciaries, we always look out for your best interest and can help you make sense of what you should do in terms of giving to make the most of your estate with minimal tax consequences. Reach out to us today to learn more about how we can help you!
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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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