What Is IRC 2523? The Gift Tax Marital Deduction

The federal government imposes a gift tax on substantial transfers of assets made by an individual during their lifetime to prevent them from avoiding estate tax. A provision within this system, governed by Internal Revenue Code (IRC) Section 2523, is the gift tax marital deduction. This deduction allows for the tax-free transfer of assets between spouses under specific conditions.

The marital deduction is an element of wealth planning for married couples that facilitates moving assets without immediate tax consequences. It acknowledges the financial partnership of a marriage, allowing spouses to share resources. The application of these rules can differ based on the citizenship of the recipient spouse and the nature of the property interest being transferred.

The Unlimited Marital Deduction for U.S. Citizen Spouses

Under IRC Section 2523, gifts transferred from one spouse to another who is a U.S. citizen are not subject to federal gift tax, regardless of the amount. This provision is known as the unlimited marital deduction. The principle behind this rule is the treatment of a married couple as a single economic entity for tax purposes, deferring any potential tax until the assets are transferred to a non-spouse or upon the death of the surviving spouse.

This unlimited deduction applies to a wide range of transfers, such as a significant cash gift, transfers of stocks and bonds, or adding a spouse’s name to a property deed. The transfer must be to a person to whom the donor is legally married at the time of the gift. The citizenship of the recipient spouse is the determining factor; as long as the donee spouse is a U.S. citizen, the deduction is available, regardless of the donor spouse’s citizenship.

This rule simplifies financial and estate planning for married couples in the U.S. They can move assets between themselves to balance estates or for other personal reasons without needing to file a gift tax return or pay gift tax for these transfers. This facilitates the flexible management of a couple’s combined wealth.

The Non-Citizen Spouse Exception

The rules change when the spouse receiving the gift is not a U.S. citizen, as the unlimited marital deduction is disallowed. This exception exists because the government is concerned that a non-citizen spouse could receive substantial assets tax-free and then leave the United States. This could potentially take the assets outside the reach of the U.S. estate tax system.

To address this, the tax code provides a special, limited annual exclusion for gifts to non-citizen spouses. For the 2025 tax year, this amount is $190,000. This figure is much higher than the standard $19,000 annual gift exclusion for gifts to any other individual and is indexed for inflation. Gifts up to this amount can be made to a non-citizen spouse in a calendar year without incurring gift tax.

For a gift to a non-citizen spouse to qualify for this special annual exclusion, it must be a “present interest.” This means the spouse must have the immediate and unrestricted right to use, possess, or enjoy the property. The gift must also be in a form that would have qualified for the marital deduction had the recipient been a U.S. citizen. Any gifts exceeding the annual exclusion amount in a given year may be subject to U.S. gift tax and must be reported.

Navigating Terminable Interest Rules

A complexity in the marital deduction involves the “terminable interest” rule. A terminable interest is a property right that will end upon the passage of time or the occurrence of a specific event. For example, giving a spouse the right to live in a house for their lifetime, with the property passing to a child upon the spouse’s death, is a terminable interest. Such gifts do not qualify for the gift tax marital deduction.

These interests are disqualified because the property might ultimately pass to a third party without being subject to estate tax in the recipient spouse’s estate. The marital deduction is intended to provide a tax deferral, not a complete escape from taxation.

A primary exception to this rule is for property known as Qualified Terminable Interest Property (QTIP). This exception allows certain terminable interests to qualify for the marital deduction if specific conditions are met. A transfer can be treated as QTIP if the recipient spouse is entitled to all the income from the property for life, paid at least annually. No person can have the power to appoint any part of the property to anyone other than the recipient spouse during that spouse’s lifetime.

To utilize this exception, the donor must make a formal QTIP election on a timely filed federal gift tax return (Form 709), and this election is irrevocable. By making the QTIP election, the donor ensures the transfer qualifies for the marital deduction. The trade-off is that the full value of the QTIP property will be included in the recipient spouse’s taxable estate upon their death, ensuring it is subject to estate tax at that time.

Reporting Gifts to a Spouse

Whether a federal gift tax return (Form 709) must be filed depends on the gift’s nature and the recipient’s citizenship. For outright gifts to a U.S. citizen spouse that qualify for the unlimited marital deduction, a return is not required.

A gift tax return becomes necessary in more complex situations. A return must be filed if a donor gifts a terminable interest to a spouse and wishes to make the QTIP election. Filing is also required for gifts to a non-citizen spouse if their total value in a calendar year exceeds the special annual exclusion amount.