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The first basic concept in estate and gift regulations is the annual exclusion. This is the amount of money a person can gift annually without affecting the unified credit (defined next). The annual exclusion limit is indexed to inflation and will change over time. In 2010 any US taxpayer can gift up to $13,000 to a single person.
Gifts that fall under the annual exclusion do not affect the gift giver's lifetime unified credit. The annual exclusion rules mean that the total amount that a person can effectively transfer to another individual without triggering taxes is very large.
You are going to need to report the amount over the exclusion on Form 709 and keeping a running, lifetime total of the lifetime exclusion used. As long as the exclusion is below the maximum, no gift tax is due. Once the exclusion reaches the maximum ($1 million), the donor calculates the tax due with Form 709.
In short, you will not have to pay tax on the $7000 over the exclusion but you will need to report it on Form 709.
If you are married you and your spouse each have the $13000 exclusion. In that case you could split the gift ($10000 from each of you to brother) and then a Form 709 is not required.
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Please verify for me the lifetime exclusion; so I can gift any amount, up to $1 million dollars to my brother before I would have to pay any gift tax at all? Does the $1 million dollar lifetime exclusion apply to all gifts to everyone or just to individual gifts? In other words, if I gifted to my brother this year and my sister next year, my sister's gift would have a separate $1 million exclusion?
No, the $1million is lifetime for all gifts to everybody combined. So in your life you can give away $1million dollars total before you have to pay a gift tax. You can give your brother $13000, your sister $13000 (let me get in line :) ) in the same year and not owe a gift tax in that year.
Your first $1 mil is gift tax free.