An important component of successful estate planning is annual gifting. The gift tax annual exclusion is the amount you may give each year to any number of individuals (child, grandchild, or other person) and certain types of trusts tax-free. These tax-free gifts do not count towards your gift and estate tax exemption and are not required to be reported to the Internal Revenue Service. The annual exclusion amount for 2023 is $17,000 ($34,000 per married couple). Making those annual exclusion gifts is a very effective way to reduce your taxable estate.
In order to maximize the benefits of tax-free gifting, married couples can elect to share their gift tax exemptions allowing gifts by one spouse to be considered made one-half by each spouse. This concept is known as “gift splitting.” While this might appear relatively straightforward, it is critical for both spouses to understand the rules related to gift splitting and the gift tax return filing requirements.
There are several conditions which need to be met for a gift to be split between spouses:
- The donor and nondonor spouse must be alive and married at the time of the gift.
- Each spouse must be a US citizen.
- Both spouses must elect for gift splitting with the IRS.
- The nondonor spouse may not receive a general power of appointment over the property transferred.
- Gifts must be split in the year that they are made.
If the gift qualifies for gift splitting, then the donor and nondonor spouse must determine whether completion of a federal gift tax return (Form 709) is required. For the 2023 tax year:
- If each spouse gifts $17,000 of separate property, there is no filing requirement.
- If each spouse gifts $17,000 of joint property (assuming each spouse had an equal right to the property), there is no filing requirement.
- If one spouse gifts $34,000 of separate property and one spouse gifts nothing than filing a federal gift tax return is required.
- If one spouse gifts $17,000 of separate property and then the couple gifts $17,000 of joint property filing a federal gift tax return is required and a consent to split gifts must be made.
Once the consent to split gifts is elected all gifts made during that calendar year are considered split.
The general rule is that both spouses must file a gift tax return and execute the consent to gift split on the other spouse’s return. There are however two exceptions to the general rule:
- Exception 1:
- Only one spouse made all of the gifts from such donor’s separate property,
- The total value to each third-party donee does not exceed $34,000, and
- All gifts are present interest gifts.
- Exception 2:
- Only one spouse (the donor spouse) made gifts of more than $17,000 but not more than $34,000 to any third-party donee,
- The only gifts made by the other spouse (the consenting spouse) were gifts of not more than $17,000 to third-party donees other than those to whom the donor spouse made gifts, and
- All of the gifts by both spouses were of present interests.
If either of the above exceptions is met, only the donor spouse must file a return and the consenting spouse signifies consent on that return.
A married couple typically has up until the tax filing deadline for the prior year to elect to split gifts made in the prior year.
As previously mentioned, annual gifting can be an impactful estate planning tool. It is however important that gifts are considered in conjunction with an individuals year end tax planning in its entirety to determine where it is best to source the gifts (joint or separate property) and whether or not the election to gift split should be made.
If you need further guidance or have any questions on this topic, the Bonadio Estate and Trust Team is here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.