If you make very large gifts during your lifetime, you may owe federal gift tax. But don’t worry too much about gift tax: the vast majority of Americans never need to pay it, because most ordinary gifts aren’t taxed. State gift taxes. Only one state, Connecticut, imposes its own gift tax. Connecticut gift tax is owed when the value of all gifts made by a resident since 2005 (not counting out-of-state real estate) reaches $2 million.
How the Federal Gift and Estate Tax Work Together
The federal gift tax is part of what’s called the “unified” federal gift and estate tax. Gift tax applies to lifetime gifts; estate tax applies to assets left at death. The idea is that whether you give assets away while you’re alive, or leave them at your death, they’re taxed the same way, at the same rate. (If there were no gift tax, then anyone could completely avoid the estate tax by giving everything away just before death.) Under current law, each of us can give away or leave up to $5.12 million* without owing federal gift and estate tax. So, for example, if during your life you give your children your house, worth $500,000, plus another $4 million in stocks and bonds, no federal gift tax will be due. In addition to the $5.12 million exemption, many other gifts are not subject to the gift tax—for example, gifts to a spouse. So if you give your $500,000 house and $4 million of other property to your children, and another $7 million to your spouse, you still won’t owe any gift tax.
http://lawbydean.com/Gift_Tax_Concerns.html
*The applicable exclusion amount is $1,500,000 (2004-2005), $2,000,000 (2006-2008), $3,500,000 (2009), $5,000,000 (2010-2011), $5,120,000 (2012) and $5,250,000 (2013).
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What’s-New—Estate-and-Gift-Tax
