Legal Definitions - gift-splitting

Gift-splitting is a provision in U.S. federal tax law that allows a married couple to treat a gift made by one spouse to a third party as if it were made equally by both spouses. This election is made for federal gift tax purposes.

The primary purpose of gift-splitting is to enable a married couple to utilize both spouses' annual gift tax exclusions and lifetime gift tax exemptions. Each individual has an annual exclusion amount (e.g., $18,000 in 2024) that they can give to any number of recipients each year without incurring gift tax or using up their lifetime exemption. By electing gift-splitting, a couple can effectively double this annual exclusion amount for a gift made to a single recipient (e.g., $36,000 in 2024). This strategy helps couples transfer more wealth tax-free.

For gift-splitting to be valid, both spouses must consent to the election for all gifts made by either spouse to third parties during that specific calendar year.

• Example 1: Maximizing Annual Exclusion for a Single Gift

  Imagine Sarah wants to give her grandson, Alex, $30,000 to help him purchase his first car. The annual gift tax exclusion for an individual is $18,000. If Sarah makes the gift alone, $18,000 would be covered by her annual exclusion, but the remaining $12,000 would reduce her lifetime gift tax exemption.

  However, if Sarah and her husband, Tom, elect to use gift-splitting, the $30,000 gift to Alex is treated as if Sarah gave $15,000 and Tom gave $15,000. Since $15,000 is below the $18,000 annual exclusion for each spouse, neither Sarah nor Tom uses any of their lifetime exemption, and no gift tax is incurred.

  This example illustrates how gift-splitting allows a married couple to combine their individual annual exclusions to give a larger tax-free gift to one person.

• Example 2: Applying to Multiple Gifts and Recipients

  Consider a scenario where Maria wants to give her nephew, Leo, $25,000 for his wedding, and her husband, Carlos, wants to give his niece, Sofia, $15,000 for her graduate school expenses in the same year.

  If Maria and Carlos elect gift-splitting for the year, Maria's $25,000 gift to Leo is treated as $12,500 from Maria and $12,500 from Carlos. Similarly, Carlos's $15,000 gift to Sofia is treated as $7,500 from Carlos and $7,500 from Maria. All these individual amounts ($12,500 and $7,500) are well within the $18,000 annual exclusion for each spouse.

  This demonstrates that gift-splitting applies to all gifts made by either spouse to third parties during that calendar year, allowing both spouses to efficiently utilize their annual exclusions across different recipients and gifts.

• Example 3: Reducing Lifetime Exemption Usage for a Very Large Gift

  Suppose David wants to give his daughter, Emily, $500,000 to help her start a new business. The annual exclusion is $18,000 per person. If David makes this gift alone, $18,000 would be covered by his annual exclusion, and the remaining $482,000 would count against his lifetime gift tax exemption (which is a much larger amount, like $13.61 million in 2024).

  If David and his wife, Lisa, elect to split the gift, the $500,000 is treated as $250,000 from David and $250,000 from Lisa. Each spouse then uses their $18,000 annual exclusion. The remaining $232,000 ($250,000 - $18,000) from David counts against his lifetime exemption, and $232,000 from Lisa counts against her lifetime exemption.

  This example illustrates how gift-splitting can significantly reduce the amount that counts against one spouse's lifetime exemption by spreading the burden across both spouses, thereby preserving more of each individual's exemption for future gifts or estate planning.