As you probably know a gift tax is due whenever you are given something of value. The value of the gift is claimed as income typically for tax purposes and provides you with a means of determining exactly how much tax is due on the item. However, the gift tax generally does not apply when it is being discussed in terms of a marriage or more specifically for these purposes a divorce.
Gift tax exceptions between spouses occur when there is either a settlement of marital support rights, or if the property being transfers qualified for the marital deduction.
Additional exceptions include when property is transferred from one spouse to another due to a divorce decree, or when an agreement is reached between the parties that is agreed upon during the course of a divorce as long as the divorce is completed within a specified period and no later. The final exception is if the property exchanged qualifies for the annual exclusion.
While it is possible to avoid the gift tax if you are transferring property to your spouse as part of a divorce settlement whether agreed upon by the spouses or not, the exception does not apply to transfers when your spouse is not a United States citizen. If your spouse is not a citizen, they are responsible for paying the gift tax. This is very important because many people are married to someone who is not a US citizen, or even a legal resident alien.
If the property being transferred is part of a divorce decree settlement then it can be transferred before the divorce is finalized and will still be exempt as long as the division of the property clearly states which spouse is receiving which property during the divorce even if the property was divided already months ago. This allows property settlement negotiations to progress and property to be divided long before the actual divorce is actually finalized without either spouse being penalized by the gift tax.
Another way you are able to benefit from the gift tax exception is if property is transferred for the settlement of marital rights or in consideration of child support. This however, can only be done if it is within a three-year period. With this exception, it does not matter if the property transferred from one spouse to the other is included in the divorce decree in order for it to be eligible to be an exception from the gift tax.
The annual exclusion has several rules and regulations that apply. First, there is an annual exclusion of $12,000 which means that once the other exclusions have been used you can exclude up to $12,000 worth of property before there is a gift tax due. However, for those spouses who are not US citizens they are allowed to receive up to $120,000 in property before a gift tax is due if the property would have been allowed to qualify as a marital deduction under the gift tax should the recipient have been a United States citizen.
As you can imagine there are times when it is very confusing how to determine which property is eligible for an exemption from the gift tax and which is not. However, if you have any questions you should always feel free to consult with an accountant or an attorney in your area who specializes in marital taxes so that you can receive the best advice possible. Remember as well that tax advice is tax deductible so you will still save even after paying the bill to an accountant or lawyer in connection to the advice on how to best proceed with the divided marital property.
Here are additional resources you might be interested in:
Tie-Breaker Rules Explained for Exemptions
Exemptions for Children of Divorced or Separated Parents
More information on Divorce Properties and Finances
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