Gift Splitting: Definition, Example, and Tax Rules

What Is Gift Splitting?

The term gift splitting refers to an estate planning tool that married couples can use to double their allowed annual gift tax exclusion amount. The gift tax exclusion is the amount that someone can transfer to another person as a gift without having to pay the gift tax levied by the Internal Revenue Service (IRS). Couples can use gift splitting to provide financial help to family or friends and avoid paying the gift tax. Married couples who want to take advantage of gift splitting must file joint tax returns in order to qualify.

How Gift Splitting Works

Gifts of money or property are subject to a gift tax if the donor exceeds the annual or lifetime gift exemption. Gift splitting is an easy way for married couples to maximize their annual gift tax exclusion amount. The IRS allows married couples who file jointly to double the amount of their gift through gift splitting.

Here's how gift splitting works. Married couples combine their individual allowances as if each contributed half the amount of the gift. The thresholds are applied to each person who is the recipient of a gift. For all gifts over the annual threshold amount, Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return must be filed with the IRS.

This means that a couple could give up to $36,000 each to any number of people in 2024 without any tax consequences. Anything over the allowed $18,000 (per individual) is still not taxable as long as it's under the lifetime gift tax limit of $13.61 million for 2024.

To qualify for gift splitting in the eyes of the IRS, both spouses must agree to the gift and specify the situation in which the gift was given when filing their tax returns. The gift giver is responsible for paying any tax and filing the gift tax return, which means that recipients generally aren't required to report the gift as income.

Special Considerations

If a couple divorces prior to filing their taxes for the year the gift took place, neither spouse can be remarried for gift splitting to qualify. In addition, neither spouse can benefit from the gift, and it must be made to a third party.

Gifts of any amount made to spouses or political organizations and payments of tuition and medical expenses on behalf of others are generally not taxable as gifts. For gifts used for medical or educational expenses, the gifts must be paid directly to the hospital, school, or applicable provider in order for the tax exclusion limits to be inapplicable.

Example of Gift Splitting

Here's a hypothetical example to show how gift splitting works. Let's consider the circumstances of Robert and Mallory McKay. Their daughter and son-in-law just found out that they are expecting a second child. They believe their house has too few bathrooms for their growing family, so they plan to turn one of their bedrooms into a bathroom. The McKays are thrilled by the prospect of becoming grandparents again and are eager to contribute to the cost of the conversion.

They expect that the additional bathroom will cost around $30,000. Knowing they would be subject to gift taxes on the funds if they wrote a $30,000 check, the McKays decide to gift-split. Robert writes one check for $15,000 and Mallory writes another for the same amount. Or they could write one check from a joint account for the total amount and still use the gift-splitting option.

This allows their daughter and son-in-law to complete the remodel without having to worry about taking out a loan. Since they are going to split the gift between the two of them, the McKays can avoid paying the gift tax but must file Form 709 with the IRS. Keep in mind that no taxes would be due if the amount is still under the lifetime gift tax amount.

The Bottom Line

Taxpayers are allowed to give other individuals a gift of money or assets without incurring any taxes as long as the value of that gift doesn't exceed a certain amount. Couples can split gifts and avoid paying any gift taxes, too. The limit for 2024 is $18,000, or $36,000 if you're a married couple who files jointly. If you're a married couple and decide to split the gift, make sure you file Form 709, which is the gift tax return.