First, what is the Gift Tax? The gift tax is a Federal tax imposed by the Internal Revenue Service for gifts made to others while you are alive. Ultimately it will only affect estates that are over $650,000 (as of 1997 the Federal Estate Tax Exemption was raised from $600,000 to $675,000 in 2000 and is scheduled to be gradually raised to $1,000,000 by the year 2006) in value. The tax starts at 37% and caps out at 60 percent. The tax can be paid when the gift is made or it can be postponed and the tax can be credited against your $675,000 Federal estate tax exemption. Without proper planning the tax can cost you and your loved ones 10s and 100s of thousands of dollars.

Most people are aware that you can exclude from gift taxes on up to $10,000.00 per person per year. This exclusion applies regardless of who you are making the gift to whether it be a relative or friend. Married persons can combine their $10,000.00 exclusion into what is called a split gift thereby giving up to $20,000.00 per year per person. If your gift to the same person exceeds the $10,000.00 or $20,000.00 limitation in a single year can be expected to pay between 37 and 60% in gift taxes or you can use up some of your valuable one time $675,000 Federal estate tax exemption.

An unlimited gift tax exclusion is available for amounts paid on behalf of a someone else, such as a relative or friend, directly to an educational organization, provided that such amounts are paid for tuition. Also, amounts paid to health care providers for medical services on behalf of a someone else qualify for an unlimited exclusion. The exclusions for qualifying educational expenses and medical expenses are available without looking at the relationship between the you, the gift giver and the recipient of the gift donee and are available in addition to the annual $10,000 or $20,000 exclusion. Now the important thing to remember is that these gifts must be made directly to the educational institution or health care provider. If you make the gift to the recipient directly this will not qualify for the exclusion.

Transfers to educational organizations and for medical expenses do not have to be reported as gifts on Schedule A (Computation of Taxable Gifts) of Form 709 (United States Gift Tax Return). Qualifying medical expenses, for purposes of the exclusion, are defined by reference to Internal Revenue Code Sec. 213 (relating to the deductibility of medical and dental expenses for income tax purposes). A good rule off thumb is whatever you could deduct on your income tax return as a medical expense will qualify for the exclusion. The exclusion is not available to the extent that the amounts paid are reimbursed by insurance.

One gift that is not subject to gift taxes is a gift made to a charitable organization. Also, these gifts will not use up any of your one time $675,000 Federal estate tax exemption. Such gift can also provide you with an income tax deduction of either 30 percent or 50 percent depending upon the organization's qualifications under the Internal revenue code. If the gift amount exceeds your taxable income in the year that it was made the excess amount can be carried over for up to five years. Often gifts to charities are used as part of charitable remainder trusts for the maximum tax benefits available.