What is the Federal Gift Tax?

The gift tax federal rules are set forth in Chapter 12, Subtitle B, section 2501 of the Internal Revenue Code.
The federal gift tax is a tax imposed on any gratuitous transfer of ownership of property.  The gift tax is imposed on the giver  of the gift - not on the recipient.  Gifts subject to the tax can be in the form of cash, stocks, real estate, or other tangible or intangible property.  A transfer is completely gratuitous when the giver receives nothing of value in exchange for the gifted property.  A transfer is gratuitous in part where the giver receives something of a value that is substantially less than the value of the property given by the donor.  In such a case, the amount of the taxable  gift is the difference between the value of the gift and the item received in exchange.  For example, if a person gifts an automobile to a neighbor and receives a lawnmower in return, the difference between the value of the automobile and the lawnmower may be taxable.

Exemptions from Gift tax

Not all gifts are taxable under the federal gift tax rules, the following are usually exempt:

• Gifts that are not more than the annual exclusion for the calendar year, which is $13,000 per person per year for tax year 2010
• Gifts to a political organization for its use
• Gifts to charities
• Gifts to one's spouse
• Tuition or medical expenses one pays directly to a medical or educational institution for someone

There are two levels of exemption from the gift tax. First, there is the exclusion noted above for gifts up to $13,000 per person per year. An individual can make gifts up to this amount to as many people as he or she wishes each year. A married couple can pool their individual gift exemptions to make gifts worth up to $26,000 per person per couple per year without incurring any gift tax. A lifetime gifting limit of $1,000,000  is allowed before anygift tax is incurred.
The treatment of a gift for purposes of the federal gift tax should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded from the gross income of the recipient under Internal Revenue Code section 102, and thus are not taxed as income.  If you give or receive a gift of over $13,000, you should seek advice from a tax attorney.