How Spouses Can Avoid Gift Taxes—and Paperwork / Write Separate Checks to Avoid Having to File Forms With the IRS

Tom Herman for the Wall St Journal writes:   Many wealthy people make gifts to family members, friends and other people through a technique known as the annual gift-tax exclusion.

The general rules sound simple. But as two readers recently reminded me, there are a few twists that are easy to overlook.

Under the annual gift-tax exclusion, you can give away as much as $14,000 this year to anyone you want (even a complete stranger)—and to each of as many people as you wish—without having to worry about any tax considerations. In most cases, you don't even have to send a form to the Internal Revenue Service reporting the gifts. This can be an easy and tax-efficient way to transfer wealth.

A New Hampshire reader asks if there is a way to give away even more without exceeding the annual limit. The answer is yes. For example, you can pay for someone else's medical or tuition bills without having those payments count toward the annual limit, as long as you make those payments directly to the medical or educational institutions.

If you're married, you and your spouse each can use the exclusion. (Example: You and your spouse could give a total of $28,000 to each of your children this year.) But be aware of the rules covering "split gifts," says lawyer Catherine Grevers Schmidt, who heads the Trusts and Estates group at Patterson Belknap Webb & Tyler in New York.

Here is how that works: If you or your spouse makes a gift to someone else, that gift can be considered for tax purposes as having been made half by you and half by your spouse, Ms. Schmidt says. This is known as "gift splitting."

In such cases, the IRS says, "both of you must agree to split the gift. If you do, you each can take the annual exclusion for your part of the gift." But if you split a gift that you made, "you must file a gift-tax return to show that you and your spouse agree to use gift splitting," the IRS says. You need to file it "even if half of the split gift is less than the annual exclusion."

Here's one easy way to avoid that filing hassle: You and your spouse could each write separate checks to the recipient this year for $14,000 or less, Ms. Schmidt says.

For more information, search the IRS website (www.irs.gov) for "annual gift tax exclusion."