Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Gift Splitting

Posted by taxguru on December 23, 2007

Q:

Sorry to bother you, but could you tell me if a husband and wife can EACH receive $12,000 (and stay within the legal limits) from the same donor, say one of the parents of the husband or wife?
 
Thanks!

A:

For gifting purposes, each person, including spouses, is subject to his/her own limits.  Thus, gift splitting between spouses has long been a standard tactic to essentially multiply the amount of wealth a husband and wife can transfer tax free to their kids and grandkids.

The annual maximum without requiring any need to dip into the million dollar lifetime exclusion is currently $12,000 from each donor (giver) to any one donee (recipient).  For example, say a married couple has a married daughter.  The father can give $12,000 to their daughter and another $12,000 to their son in law.  The mother can give another $12,000 to the daughter and another $12,000 to the son in law.  This makes a total of $48,000 that can be transferred tax free during each calendar year.  If there are grandkids, the older parents can also each give another $12,000 to each of their grandkids. 

Since gifts of any size or total amount are always tax free for the recipients, the potential gift or estate tax hit is on the donors (givers) if they give away too much.  Therefore, it is critical for them to work on any gifting and estate planning scenarios with their professional advisors.

There are also other aspects to consider, especially if the gifts are not of after tax cash.  Gifts of appreciated assets carry with them potential capital gains taxes on the recipients if and when they sell those items; so deciding exactly what is transferred is something that should be done with the assistance of professional advisors. 

FYI: Here is an excerpt from the QuickFinders Tax Planning For Individuals that covers this point.


Annual Gift Tax Exclusion

A taxpayer can give $12,000 per person (for 2007) to any number of recipients in a calendar year without paying federal gift tax. An unlimited amount can be given each year as long as no recipient receives more than $12,000. Gifts that qualify for this annual exclusion are never taxed­no gift tax is owed when the gift is made, and the gift is not taxed at death. If a gift is over $12,000, only the excess is a taxable gift. The annual exclusion is indexed for inflation and will change again when cost of living adjustments reach the next $1,000 multiple.

Present interest required. To qualify for the annual exclusion, a gift must be a present interest­the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. The annual exclusion does not apply to a future interest­the recipient’s rights to benefit from the property begin at some future date. Most gifts to trusts do not qualify for the annual exclusion because they are gifts of future interests. Exceptions include gifts to a minor’s trust and gifts to a trust that includes a Crummey power.

Gifts from married couples. Each spouse has an annual exclusion. Couples can therefore transfer a combined total of $24,000 to a single recipient in 2007 and not exceed their combined annual gift tax exclusions.

Gift splitting. If a gift in excess of $12,000 is made by only one spouse, the couple can use both annual exclusions by filing gift tax returns electing to split gifts. A gift-splitting election applies to all gifts made by the couple in a calendar year and attributes one-half of each gift to each spouse.

Community property. Gifts of community property are considered for federal gift tax purposes as made half by the husband and half by the wife. This results not from gift splitting, but from federal recognition of the state’s community property rules. Thus, a gift-splitting election is not needed for community property gifts.

Qualified Transfers–Tuition and Medical Care

Direct payment of medical expenses or tuition for another person is not a gift for gift tax purposes [IRC §2503(e)]. Payment must be made to the school or medical provider and not to the beneficiary. The beneficiary of a qualified transfer does not need to be related to the taxpayer. A qualified transfer does not prevent the donor from making an annual exclusion gift directly to the beneficiary of the qualified transfer. Qualified transfers are not reported on Form 709.

Tuition. Tuition paid to primary, secondary, preparatory or high schools, and colleges and universities for another person qualifies for the tuition exclusion.

Payments for books, supplies, dormitory fees and board do not qualify. Tuition for part-time students qualifies.

Medical care. Medical payments can cover any type of expense deductible for income tax purposes, including payment of insurance premiums.

Transfers to QTPs

Contributions to a qualified tuition program (QTP) are not direct payments of tuition excluded from the gift tax as qualified transfers. However, these contributions are considered gifts of a present interest and are eligible for a special election spreading them over five years.

Good luck.  I hope this helps.

Kerry Kerstetter

 

Follow-Up:

Kerry,
 
Thank you very much. This helps a lot!!

 

 

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