Gift Tax Exclusion

• Small gifts do not trigger the gift tax due to the gift tax exclusion. The IRS states that a $13,000 annual exclusion applies to gifts given to any recipient: if you don't give someone gifts that exceed $13,000 of value during the course of a year, you don't have to worry about the gift tax. The exclusion applies to each donor of gifts, so a married couple can give up to $26,000 a year to a family member without incurring gift tax. Spouses can give as much as they wish to one another without incurring gift tax, and gift tax does not apply to money paid directly for college tuition.
  
  

Gifts of Assets

• Gift tax applies to gifts of cash and gifts of assets. If you give an asset of significant value, its value for purposes of the gift tax is its fair market value, which is the amount you would have to pay to buy it from a third party. For example, if you purchased a car for $30,000 seven years ago, but its current value is only $10,000, you will not owe gift tax on the car if you give it to your child because its fair market value is below your gift tax exclusion.
  
  

Lifetime Tax-Free Limit

• Taxpayers are granted a lifetime tax-free gift limit that may mean you owe no gift tax even if you give gifts that exceed the annual exclusion. TurboTax states that the lifetime tax-free gift limit was $1 million in 2010 and increased to $5 million in 2011. Every dollar that you give that exceeds your annual exclusion is subtracted from your lifetime tax-free limit and reduces the exclusion you can take on your estate taxes.
  
  

Multiple Recipients

• A different annual exclusion of $13,000 applies to each gift recipient. This can provide a way for parents and grandparents to distribute wealth to children, grandchildren and other relations over time without incurring gift tax or using up the estate tax exclusion. For example, a man with 20 grandchildren could give $10,000 to each grandchild every year without going over the $13,000 per person limit.