Video: Federal Gift Tax Law

Hello, I'm Jeremy from TurboTax with important news about the Federal Gift Tax. Not only does the Federal government collect tax on the income you earn, but it also imposes tax on large gifts you make during the year. However, the average taxpayer rarely pays gift tax. Here's why.

The annual exclusion is what generally keeps most people from paying gift tax. Each year the government sets a limit on the total value of gifts you can make to each person without having to pay gift tax. In 2010, the amount is $13,000. What this means is that you can give each of your children a check for $13,000 and not have to worry about gift tax. Even if you give each of your children a $25,000 check, the availability of another benefit called the Unified Credit will most likely exclude the gift from tax.

Let me give you an example of how this works using your $25,000 gift. You first apply the annual exclusion to reduce the gift by $13,000 to $12,000. Now, to avoid paying gift tax on $12,000, you can use a portion of your credit which usually is $1,000,000 but keep in mind that you have to reduce your credit balance by the 12,000 which means you have $988,000 worth of Unified Credit left that you can use at any point during your life to eliminate the tax.

For more information about income taxes, visit TurboTax.com.