Before we explain the annual gift tax exclusion, we should provide a bit of background information. The estate tax was established in 1916. At first, there was no gift tax. As a result, high net worth individuals gave gifts while they were living to avoid the estate tax.

The tax man took notice, and a gift tax was enacted. It was briefly repealed, but it returned for good a couple of years later. These days, the gift tax is unified with the estate tax.

Annual Gift Tax Exclusion

Gifts that you give to others are potentially taxable at a maximum rate of 40 percent. However, most people never pay the gift tax because there are exclusions. One of these exclusions is the annual gift tax exclusion.

You can use this exclusion to give tax-free gifts to others each year. The amount of the exclusion is $14,000 at the present time. Each taxpayer may give as much as $14,000 to any number of gift recipients each year free of the gift tax.

There is no limit to the amount that you can give tax-free using the annual gift tax exclusion, but you may not give more than $14,000 to any one person within a calendar year.

It should be noted that you do not have to use a gift tax exclusion to give a tax free gift to your spouse if you are married. There is an unlimited marital deduction. You can transfer unlimited assets to your spouse free of transfer taxes either while you are living, or after you pass away.

Unified Lifetime Gift and Estate Tax Exclusion

In addition to the annual gift tax exclusion, there is also a unified lifetime gift and estate tax exclusion. The amount of this exclusion in 2014 is $5.34 million.

It would be possible to give a tax free gift to someone that exceeds $14,000 within a calendar year, but you would be using some of your annual lifetime gift and estate tax exclusion to do so.

Additional Gift Tax Exclusions

There are some additional gift tax exclusions that you should be aware of when you are planning your estate. One of them is an educational exclusion.

You can pay tuition for any number of students, equaling any amount of money, without incurring any gift tax responsibility. However, this is a tuition only exclusion that does not extend to books, fees, and living expenses.

There is also a medical gift tax exclusion. Under the tax code, the gift tax is not applicable if you pay medical bills for others.

This exclusion extends to the purchase of health care insurance.

To take advantage of the medical gift tax exclusion, you must pay the care provider directly. You cannot give the assets to the patient.