According to the Internal Revenue Code, a person gives a gift when he gives property (including money), to another without the expectation of receiving something of approximately equal value in return. A gift may also be the use of or income from property. Selling something at less than its full value, or making an interest-free or reduced interest loan, may also constitute a gift.

Although any gift has the potential to be taxable, there are a number of exceptions. For 2005, the first $11,000 given to any one person during the calendar year is not subject to the gift tax. That amount increases to $12,000 in 2006. Educational and medical expenses paid directly to a medical or educational institution for a person will not trigger gift tax provisions. Moreover, gifts to a spouse, a political organization, or charities are generally also exempt.