Are gifts made to your spouse subject to the federal gift tax? Like a lot of questions regarding taxation, the answer is, “It depends.” A gift to your spouse may be taxable if she isn’t a U.S. citizen and if it’s not a “present interest” gift.
Gifts to Citizen Spouses vs. Non-Citizen Spouses
The unlimited marital deduction allows you to gift any amount of money or property to your spouse without incurring either the federal gift tax or a state gift tax if you live in a state that imposes one.
You have another option if your spouse isn’t a U.S. citizen: The annual exclusion from gift taxes for gifts specifically made to non-citizen spouses. This annual exclusion was $143,000 in 2013, increasing to $145,000 in 2014, $147,000 in 2015, and $148,000 in 2016. “Annual” is the key word. You can give this much per year without incurring the gift tax, which can add up considerably over a lifetime, effectively making citizenship a non-issue over the long term.
Gifts of Present Interest vs. Gifts of Future Interest
There’s another catch beyond citizenship. A gift to your spouse qualifies for the unlimited marital deduction only if she has a “present interest” in the gifted property. This means you must give the property over to her entirely for her use, enjoyment and benefit, free from any strings attached. She takes sole title to the gift if it’s real or tangible property.
If you reserve a life estate for yourself in a piece of real estate that will fully vest to your spouse when you die, this is a future interest gift — she doesn’t become the full and vested owner of the property until that time. A gift made to a trust for the benefit of your spouse is also a future interest gift — your spouse doesn’t have an immediate right to use, enjoy and benefit from the property because the trust owns and controls it. The entire gift is taxable for gift tax purposes, regardless of whether your spouse is a U.S. citizen and must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Tax law invariably includes catches and loopholes that can change rules as they appear on the surface. For example, forming a qualified domestic trust for benefit of your spouse can allow you to pass a gift to her after your death without taxation. But these types of trusts are complicated, so speak with an estate lawyer or tax attorney to make sure you understand all the implications and rules.
NOTE: State and local laws change frequently, and the above information may not reflect the most recent changes. Please consult with an accountant or an attorney for current tax or legal advice. The information contained in this article is not tax or legal advice, and is not a substitute for tax or legal advice.