Gift Tax

• Gift tax is applied by the IRS against gifts in excess of a defined annual limit, and is paid by the giver unless special arrangements are made. In 2009, the annual limit was $13,000. This means that any nonexempt gift exceeding $13,000 made to an individual was subject to taxation.
  
  

Nontaxable Gifts

• Not all monetary gifts are taxable by the IRS. You can give freely to your spouse with no penalty. A gift used to pay educational or medical expenses is not taxed by the IRS, and any gift to a political organization is likewise not taxed. Charitable contributions are not taxed and may be deductible. Any other gift that exceeds the value of the IRS's annual exclusion is taxable.
  
  

When It's Not A Gift

• Gifts are specifically defined by the IRS as transfers of money or goods without consideration in return. If you "give" cash to a child who helps care for you or provides some gift in return, you can define the gift as a payment instead for tax purposes. Provided the value of the child's services are arguably equivalent or in excess of the gift, the IRS will treat the gift as income for the child. In some cases, such as caregiver services, your "gift" will even be tax-deductible.
  
  

Annual Exclusion

• Even if you've given in excess of $13,000, you may not have to pay gift tax. Spouses can "split" a gift with you by putting half the gift in their name and half in yours. This raises the taxable limit to $26,000 (as of 2009) for an individual. In addition, gift taxes are subject to the unified credit clause.
  
  

Unified Credit

• Every taxpayer is given a credit to be applied against both gift taxes and estate taxes, called the unified credit. This credit allows you to give part of your estate away during your lifetime without tax penalties, up to the $1 million exempt portion. To apply the unified credit, figure the tax on your current gift; then subtract it from the unified credit total, equal to $345,000 in 2009. If your gift tax would be $2,000, for instance, you have a remaining unified credit total of $343,000. Every year gift tax is applied, you may subtract that tax from your running unified credit total. When you die, the remaining unified credit is applied against your estate taxes.