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Paying taxes on money you give to family and friends after you've already paid income taxes on it can be frustrating, and many argue that the IRS gift tax forces you to do just that. However, there are many ways to avoid having to pay the gift tax on money and property that you share with family, friends, political allies, and favorite charities. It's simply a matter of knowing how the rules work. When you make a gift that exceeds the exclusion amount (or a gift that has been split with a spouse) you are required to complete and file Form 709 for the IRS and submit by April 15 of the following year. The person giving the gift is typically responsible for paying the taxes, although in some situations, the recipient of the gift can arrange to pay instead.
Your Spouse
While the gift tax kicks in if you give money to parents, children, or non-relatives, anything that you give to your spouse is not subject to the gift tax rule. In fact, you and your spouse can each give separate gifts to the same person, effectively increasing (doubling) the exclusion limits on the gift tax. For example, between the two of you, you could gift a child $26,000 instead of $13,000 without paying the gift tax. Whenever you split gifts, you may not owe a gift tax payment, but you are required to report the gift to the IRS using Form 709.
Medical and Educational Payments
If you pay for the medical care for someone in your family, the money you spend on their care is not considered a gift and you do not have to pay taxes on that gift. The same is true if you pay for someone's tuition. These payments are excluded from the gift tax rule, and if these are the only types of gifts you've made, you do not even have to file a Form 709 with your taxes.
Gifts to Multiple People
As long as you keep the cash or property gift under the exclusion limit ($13,000 in 2009 - or $26,000 if you split the gift with your spouse) you can give any number of gifts without owing any gift tax. You can give $13,000 to each of your 12 nieces and nephews without having to pay any gift tax whatsoever.
Political Donations
Cash gifts made to political organizations are done so tax free. There is no limit on the amount you can give.
Charitable Donations
Donations to charitable organizations can also be excluded from the gift tax. For any exclusions, be sure to consult with a tax attorney or your accountant.
Unified Credit
Once you've exhausted all of your exclusions, you are still able to avoid paying taxes on gifts using the unified credit. In 2009, the unified credit increased from $345,800 to $1.455,800 and the applicable exclusion amount increased from $2,000,000 to $3,500,000. When you give a gift, as you complete Form 709, you will be able to apply this credit against whatever gift you make, extending your tax free gift giving ability to nearly $1.5 million.
