Most Gifts Are Not Taxable; For Example, Gifts To A Spouse, Charity, or Annual Exclusion Gifts
Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2010, the annual exclusion is $13,000.
Gift Tax Return Required When Gift Exceeds Annual Exclusion
Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
Recipient (Donee) Pays No Gift Tax or Income Tax on Receiving Such Gift
Generally, the person who receives your gift will not have to pay a federal gift tax on receipt of such gift. Also, that person will not have to pay income tax on the value of the gift received.
Gifts To Individuals Have No Impact on a Form 1040, Federal Income Tax Return
Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make to individuals. Remember you can deduct on Schedule A as an itemized charitable deductions gifts that you make that qualify as charitable contributions.
The following gifts are not taxable gifts: (A) Gifts that are not more than the annual exclusion for the calendar year; (B) Tuition or medical expenses you pay directly to a medical or educational institution for someone; (C) Gifts to your spouse: (D) Gifts to a political organization for its use, and (E) Gifts to charities.
Gift Tax Strategy: Gift Splitting With Spouse
You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to take advantage of this gift splitting election even if half of the split gift is less than the annual exclusion.
When Is A Gift Tax Return Required?
You must file a gift tax return on Form 709, if any of the following apply: (A) You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year; (B) You and your spouse are splitting a gift; (C) You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future; (D) You gave your spouse an interest in property that will terminate due to a future event.
Gift Tax Return Not Required for Gifts To Political Organization and For Tuition or Medical Expenses
You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone's tuition or medical expenses.
Additional resources provided by the author
For more information see Publication 950, Introduction to Estate and Gift Taxes.