As of January 1, 2009, you can give gifts of up to $13,000 without incurring a gift tax. Further, that amount is per year, per donor and per donee so that this year every person can give $13,000 to any number of individuals without any tax implications. Last year the limit was $12,000.
This can be a valuable estate planning tool for those that need to reduce the size of their estate, and thus estate taxes, in contemplation of their death. For example, say an older couple has accumulated a few million dollars in assets, some of it in cash, and they have seven heirs (e.g., two children and five grandchildren). This year, they can gift $26,000 to each heir ($13,000 from husband, $13,000 from wife), thereby reducing the size of their estate by $182,000 ($26,000 x 7 heirs). They can do the same thing next year as well, and reduce their estate by another $182,000. Further, payments made directly to educational or medical providers are not included in the $13,000, so those can be additional non-taxed gifts. By following this plan year after year, the couple could conceivably bring the size of their estate down below the estate tax exemption threshold for the year they die (currently $3.5M per person, but going down to $1M in 2011), thereby saving their heirs hundreds of thousands of dollars in estate taxes.
For larger gifts, a tax will be imposed on any amount over $13,000 unless the taxpayer elects to apply the overage to their lifetime $1,000,000 gift tax exemption. For example, in any one year, the older couple above can gift a total of $382,000 to their heirs, apply $200,000 of it to their lifetime gift tax exemption, and pay no tax on any of it. (However, utilizing their lifetime gift tax exemption for this purpose will cause a dollar-for-dollar reduction in their estate tax exemption).