Gift Tax Fundamentals

• The taxable amount of your annual gifts is equal to the value of all cash and property you give away, less a variety of exemptions and exclusions. These nontaxable gifts include anything you give to your spouse, donations to tax-exempt charitable organizations, certain contributions to political organizations, payments for someone's medical or tuition expenses, provided you make payment directly to the medical facility or educational institution and any gift you make that doesn't exceed the annual exclusion. Only when there are excess gifts after applying all available exclusions and exemptions do you have to file a gift tax return on Form 709. However, the filing of a gift tax return doesn't necessarily require you to pay gift tax.
  
  

Annual Exclusion Limits

• The annual exclusion is what shields most of the gifts you make from tax as it provides an annual limitation on the total value of gifts you can provide to each individual. However, a separate exclusion exists for each person, which allows you to make the maximum tax-free gift to an unlimited number of individuals during the year without incurring even a dollar of gift tax or having to file a gift tax return. The exclusion amount changes each year, but in 2011 for example, the IRS allows you to make up to $13,000 worth of tax-free gifts to each person.
  
  

Exceeding Annual Exclusion

• In the event you provide someone with gifts for which the value exceeds the annual exclusion maximum, you then have an obligation to file a gift tax return. However, you only report the amount or value of the gift that exceeds the annual exclusion as the taxable gift. For example, if during 2011 you provide each of your three children with $15,000, only $2,000 of each gift is taxable and will require the reporting of $6,000 in taxable gifts for the year. You can still avoid paying gift tax if you have a unified credit balance available.
  
  

Unified Credit

• In addition to utilizing annual exclusions, the federal gift tax laws provide every taxpayer with a $1 million unified credit. The credit gives you a second opportunity to eliminate the tax liability on your taxable gifts. However, you only receive one credit during your lifetime, and its balance decreases every time you use it. To illustrate, suppose you have the entire $1 million credit balance available in the year you make the three $15,000 gifts to your children. You can reduce your $6,000 of taxable gifts to zero by electing to use $6,000 of your unified credit on Form 709.