Gift Tax

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To help prevent people from trying to minimize estate tax by giving away much of their wealth before they die, a gift tax is levied on the donor for gifts from one person to another. The recipient of the gift typically does not have to pay tax on the gift; gifts between spouses are generally free from gift tax. The tax is a federal government tax but can also be levied by many states. Gift tax only applies to larger gifts, usually those totaling in excess of $13,000 in any one year (for 2011). This limit is known as the annual exclusion and can be increased by the government based on inflation. Gift tax is a graduated tax, meaning that the greater the amount of the gift, the higher the gift tax. However, while people who do make gifts that exceed the annual exclusion must report the gifts when they file their taxes, they only actually pay the gift tax when a lifetime limit is exceeded, which in 2011 is $5,000,000. In this way, the IRS can keep count of how much of the lifetime limit is being used up.