Gifts to Your Spouse

All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If your spouse isn't a citizen, the limit on tax-free gifts is currently $120,000 per year. (Internal Revenue Code § 2523(a).) However, there's seldom a reason to make large gifts to your spouse. If you each own about the same amount of property, you could worsen your tax situation by saddling your spouse with an estate that's so large it will be taxed at his or her death.

How Gifts Can Add Up

Using the annual exclusion repeatedly over a number of years can greatly reduce the size of your estate -- and your ultimate estate tax bill. Let's say you give $7,000 each to your two children, three years in a row; none of this $42,000 is subject to gift tax. Nor would it be subject to any eventual estate tax when you die. If you give $10,000 per year to one person for five years, you've given away $50,000 tax-free. (If you gave the same $50,000 to the same person in one year, you would get only one $12,000 exemption; $38,000 would be subject to tax.)

Timing Your Gifts

To make the most of the annual exemption, keep in mind that it is based on a calendar year. If you miss a year, you can't go back and claim that year's exemption amount. But if you spread a large gift over two or more years, you may escape gift tax complications. For instance, if you give your daughter $20,000 on December 17, $8,000 of it is taxable. You'll have to file a gift tax return (by April 15 of the next year), and you'll use up $8,000 of the total amount you can give away or leave free from estate tax. But if you give your daughter $10,000 in December and wait to hand over the other $10,000 until January 1, both gifts are tax-free.