The IRS doesn't tax small gifts.
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If you're feeling generous, the Internal Revenue Service encourages you to give--to a point. Gift tax doesn’t affect your federal income tax, and you can give gifts to your spouse, to a charity or to a political organization without filing a gift tax return. However, if you want to give money to your children or your best friend, you’ll probably have to file a gift tax return and at least account for the money to the IRS.
An annual exclusion for everyone keeps most people from having to file a gift tax return. You can give the annual exclusion limit to anyone you want without any reporting or accounting. That limit is $13,000 under the 2012 regulations. You can also pay tuition to a college or university and claim an educational exclusion. Pay medical expenses directly to a hospital or clinic and claim a medical exclusion. Just like gifts to your spouse or a charity, you’ll pay no gift tax on any of these gifts.
The unified credit works like
a lifetime credit -- but only for so long as the law is in effect. Under the unified credit in effect in 2012, you have a lifetime credit of $1,772,800. The unified credit is slated for reduction at the end of 2012. When you give gifts in excess of the exclusions, you file a gift tax return and subtract the excess from the unified credit. You keep a running total each year. This gives the IRS a paper trail so you can’t give away your estate before you die and avoid estate taxes. Your heirs can use any unified credit not used for gift taxes for estate taxes.
You must file a single gift tax return for all gifts for a calendar year. If you are married, you and your spouse must file separate gift tax returns in one envelope if you use gift-splitting or if you transfer community property or property held in joint tenancy. File IRS Form 709 between January and April 15 of the year following the calendar year of the gift. Gift tax, if you owe any, can be as high as 35 percent.