Q & A – What is Gift Tax?

Gift tax between partners can be a nuanced topic, as it largely depends on whether the partners are married or unmarried, as well as the specific tax laws of the country or jurisdiction involved. I’ll break it down, focusing on the U.S. tax system, but similar principles may apply in other places with variations in limits or rules.

1. Gift Tax for Married Couples:

In the U.S., married couples generally have significant advantages when it comes to gifting, as gifts between spouses are largely exempt from gift taxes under the unlimited marital deduction rule.

– Unlimited Marital Deduction:

If you are legally married, you can transfer an unlimited amount of money or property to your spouse during your lifetime without incurring any gift tax. This means there is no limit on the value of gifts you can give your spouse without worrying about gift taxes, provided both spouses are U.S. citizens. However, if your spouse is not a U.S. citizen, the unlimited deduction does not apply. Instead, the IRS allows you to gift up to a certain threshold each year tax-free (in 2023, it was $175,000).

– Joint Ownership of Property:

Married couples often share property or assets, so transferring assets between each other can be more flexible and free of tax concerns.

– No Impact on Lifetime Exemption:

Since gifts between spouses are usually tax-free, they also don’t count toward your lifetime gift and estate tax exemption, which is quite high (currently over $12.9 million per individual in 2023 in the U.S.). This lifetime exemption can protect large estates from federal estate tax upon death.

2. Gift Tax for Unmarried Couples:

For unmarried partners, the rules are different. Gifts between unmarried couples are subject to the same limits and rules as gifts between any individuals who are not legally married.

– Annual Exclusion Amount:

In 2023, you can give up to $17,000 to any individual (including your partner) per year without triggering the gift tax or needing to file a gift tax return. This is called the annual gift tax exclusion. If the gift exceeds that amount, you are required to file a gift tax return, but that doesn’t necessarily mean you’ll owe tax right away.

– Lifetime Gift and Estate Tax Exemption:

Gifts that exceed the annual exclusion amount reduce your lifetime exemption, which, as mentioned, is quite large (over $12.9 million in 2023). So if you give your partner a gift worth, say, $50,000 in a single year, the first $17,000 is excluded, and the remaining $33,000 would count against your lifetime exemption. Only once you’ve exceeded your lifetime exemption will you owe gift tax.

– No Special Treatment for Partners:

Unlike married couples, unmarried partners do not get an unlimited marital deduction or other special treatment for gifting. This means they must follow the standard gift tax rules for any gifts they give, whether they are small amounts of money, large sums, or even property and other assets.

3. Examples of How Gift Tax Works:

Married Example: If you’re married, you can gift your spouse $1 million without filing a gift tax return or paying any tax. The unlimited marital deduction means there’s no tax owed on any amount gifted.
Unmarried Example: If you’re unmarried and gift your partner $50,000 in a single year, you can give up to $17,000 tax-free under the annual exclusion. The remaining $33,000 will be subtracted from your lifetime exemption. You would need to file a gift tax return, but you wouldn’t owe taxes until you’ve used up your entire lifetime exemption.

4. Joint Gifts and “Gift Splitting” for Married Couples:

If you are married, both spouses can give a gift together using the annual exclusion. This is known as gift splitting, which effectively doubles the annual exclusion amount to $34,000 (in 2023). This is particularly helpful if you want to gift money or assets to a child, a relative, or even a non-spouse.

– Example of Gift Splitting:

If a married couple wants to give their adult child a $34,000 gift, they can do so without filing a gift tax return by using gift splitting. Each spouse is allowed to give $17,000 individually.

5. Non-Cash Gifts:

The rules apply not just to cash but also to non-cash gifts like property, stocks, vehicles, or other valuable items. The IRS considers the fair market value of the gift (at the time it was given) when determining if it exceeds the annual exclusion.

– Example:

If you gift your unmarried partner a car worth $25,000, $17,000 would be covered by the annual exclusion, and the remaining $8,000 would count against your lifetime exemption.

6. Gift Tax Return (Form 709):

When you give a gift that exceeds the annual exclusion amount, you’ll need to file IRS Form 709 (the United States Gift and Generation-Skipping Transfer Tax Return). This form reports gifts that exceed the annual exclusion, and it tracks how much of your lifetime exemption has been used. Even though filing is required, this does not necessarily mean you’ll owe taxes, unless your cumulative gifts throughout your life exceed the lifetime exemption.

7. Gift Taxes and Divorce:

If a married couple divorces, the tax treatment of gifts can change. While married, transfers between spouses are generally free of gift tax. After a divorce, however, those transfers can become subject to gift tax if they are no longer within the confines of an equitable settlement.

Conclusion:

Gift taxes between partners largely depend on marital status. Married couples benefit from the unlimited marital deduction, allowing them to give unlimited gifts without tax consequences. Unmarried partners, however, must follow the standard gift tax rules, adhering to the annual exclusion and lifetime exemption limits. Gift tax laws can be complex, and the impact of these taxes depends on the value of the gifts and your financial situation.

If you anticipate giving significant gifts, especially if you’re unmarried, consulting a tax professional is a smart way to ensure compliance with gift tax laws while optimizing your gifting strategy.

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