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A gift tax is a tax on the combined total value of the taxable gifts you make that exceed your lifetime federal tax-exempt limit of $1 million. The tax is figured as a percentage of the value of your gifts over that amount.
For example, if during your lifetime you make taxable gifts of money and property valued at $1.2 million, you will owe federal gift tax on $200,000. You might also owe state gift tax, depending on where you live.
However, you can make annual tax-free gifts to as many individuals and nonprofit institutions as you like. As long as the value of the gifts to each individual is less than the annual limit set by Congress, that amount doesn't count against your lifetime tax-free limits.
Gifts to nonprofits are not taxed and don't count against your lifetime limit either.
If you're married, you can give your spouse gifts of any value at anytime, totally tax free, provided he or she is a US citizen. There are limits on spousal gifts when the spouse is not a citizen.
You are not required to report the tax-free gifts on your tax return, but you must report taxable gifts whose value exceeds the annual tax-free limit on IRS Form 709 for the year you make them. The tax becomes due when the cumulative total exceeds $1 million.
However, the law setting the $1 million limit is set to expire at the end of 2010. Unless Congress acts before that date, the lifetime tax-exempt limit will fall back to $675,000.Yahoo Finance - Cite This Source - This Definition
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