I was recently asked about the 2010 gift tax limit, or gift tax exclusion, so I thought there might be other readers who could benefit from a review of this concept.  A gift is considered to by anything that is given to another person, where full value is not received in return.  All gifts are taxable, but there are a number of exclusions to this rule.  The following are examples of gifts that are not taxable:

1. 1.  Gifts that are not more than the annual exclusion for the calendar year (currently $13,000 per person).
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse (this is unlimited).
4. Gifts to a political organization for its use.
5. Gifts to qualifying charities.

Can I deduct gifts on my tax return?

Making gifts to others does not affect your tax return.  You may not deduct the value of gifts on your tax return (other than your gifts to qualifying charities).

What exactly is the annual exclusion mentioned above?

The annual exclusion is the amount of money that you can give to anyone each year, and not be subject to a gift tax.  Currently this amount is $13,000 per person, per year.  If you are married, your spouse can also give $13,000 to that same person, totalling $26,000.  If you go over this amount, the excess amount will be subject to a gift tax.

How many annual exclusions can I have?

You can give the $13,000 per person to as many people as you want in a given year.  For example, if you

wanted to give away $13,000 to each of 100 relatives, you could give away a total of $1,300,000 and not have to pay any gift taxes.  (I don’t know too many people who would actually to that right now, but you could.)

What if I give away more than $13,000 to one person in a year?

If you give away more than the annual exclusion of $13,000 in a year, then a gift tax will apply to the amount over $13,000.  However, the tax on this amount can be applied to your unified credit amount of $345,800.  This amount is a lifetime credit that can be used to essentially allow you to gift away up to $1 million dollars during your lifetime, and not have to pay a gift tax on it.  Even though you don’t have to pay the gift tax in this scenario, you still have to file a gift tax on form 709 with the IRS.

The bottom line.

You can give away up to $13,000 per year to as many people as you want and not have to pay a gift tax.  If you go over that amount, it will be subtracted from your lifetime unified credit amount of $1 million that you can gift away without having to pay gift taxes.