What is Gift Splitting?

Gift splitting is a practice that raises the total amount of money that can be given to someone before gift tax laws apply. In many countries, there are limits set on the amount of money one person can give another in any given year before either the person giving the gift or receiving it must pay taxes. What works individually may fall under different rules if a couple, married or possibly domestic partners, gives a gift. Both individuals within the couple can give the maximum gift amount, so that the person receiving the gift may receive double the amount before any type of tax is assessed. Another form of gift splitting can be applied when giving a gift to couples because the maximum gift amount can be separately given to each member of the couple, at least in places like the US where the gift tax is common.

Rules for maximum amounts given per year may vary by country or region, and in countries like the US, the maximum amount that can be given from one individual to another is slightly above $10,000 US Dollars (USD), which is subject to change. A couple could apply the gift splitting rule if they wanted to give a gift to one of their children that exceeded the $10,000 USD amount. Both spouses could each give this amount, so that the child in question received $20,000 USD, and this money would not be taxed.

To further explore gift splitting, the spouses might give a $20,000 USD gift to a child, and if that child is married, they could give $20,000 USD to the child’s spouse. Theoretically, they could also give this amount to any of their grandchildren, too.

The gift tax is a limit imposed on gifts to the individual and there is no limit on giving gifts to other people provided the money doesn’t at any time exceed the gift tax amount. In this sense a couple that decides to give their daughter the full amount, their son-in-law the full amount, and their three grandchildren full gifts could essentially hand over more than $100,000 USD as a tax free gift, per year. Sometimes when people inherit large sums of money or win the lottery, they use gift splitting to enrich their friends, children, or grandchildren with this method.

Gift splitting is not effective if a couple wants to give a gift that exceeds the maximum non-taxable amount. Still, it can reduce the total amount of the gift that can be taxed. Another method that may be employed to increase gift giving is to send part of the amount through a third party. The married couple could give $5000 USD or any other amount in excess to someone else who agrees to “regift” it to the intended party. This is not always acceptable or legal, and people might want to seek advice on whether to consider this method as a means of raising a gift amount, while paying no taxes.