Normally, when you make a gift to a third party, you are subject to the federal gift tax if the amount of the gift is more than the annual exclusion amount, which is $13,000 for 2012. So any gift you make for less than that amount is excluded from gift tax and you would not have to file an annual gift tax return. The exclusion amount applies to each individual, so you could make multiple gifts to different persons and not be subject to the gift tax provided that each gift is less than the exclusion amount.
When a married couple wants to make a gift to a third party, each spouse can take the annual exclusion from the gift tax. The IRS refers to this as gift splitting and the gift is considered as made one-half by each spouse. The couple can use gift splitting even if the gift is from only one of them. So either spouse or the couple together could make a gift of up to $26,000 to any person and not be subject to the gift tax.
As pointed out in Elder Law Answers, this can be an effective strategy for shifting money to children or loved ones, without being subject to gift tax, and reducing the taxable estate. For example, a couple could give gifts to a married child and his or her spouse for a total of up to $52,000 in a year ($13,000 from each spouse to the child and to his or her spouse).
Both spouses must agree to split the gift and must file a gift tax return (Form 709) to show that they agree to use gift splitting. According to the IRS, you qualify for gift splitting if you were married at the time of the gift and neither spouse was a nonresident alien at the time of the gift. If you were divorced or widowed after the time of the gift, you qualify for gift splitting if you did not remarry during the rest of the calendar year.
A couple cannot file a joint Form 709. Each spouse must file his and her own return. Spouses who are splitting gifts must sign line 18 in Part I of Form 709. The IRS points out that the spouses’ individual gift tax returns should be filed together, in the same envelope, to help the IRS process the returns.
The IRS points out that if a couple makes a gift of community property each spouse is considered to have made one-half the gift. The same applies to gifts of property held by the couple as joint tenants or tenants by the entirety.
Generally, gifts between spouses are not subject to the federal gift tax, regardless of the amount. But gifts made to a spouse who is not a U.S. citizen are not exempt. But there is a higher exclusion amount, which is $136,000 in 2012.
Sources:
Instructions for Form 709, IRS
Publication 950, Introduction to Estate and Gift Taxes, IRS
Will You Owe a Gift Tax this Year? Elder Law Answers
Reference:
- Gift Tax Basics: www.fool.com/taxes/2002/taxes020524.htm?ref=foolwatch
- Gift Tax Reporting: www.hawcpa.com/_home/gift_tax_reporting.asp
- Tax Code – Estate and Gift Tax: invest-faq.com/articles/tax-estate-gift.html
