What is the meaning of an annual gift tax exclusion?

The annual gift tax exclusion is the total amount per year an individual can give to another person without incurring federal tax penalties. The amount set for the exclusion can be given to an unlimited number of individuals without penalty.

The annual gift tax exclusion may be adjusted each year based on the rate of inflation. Both monetary and non-monetary gifts must be included when calculating the total value given to an individual. Tuition, medical or dental payments that are made directly to the provider do not count toward the limits of the exclusion. Gifts made by spouses to the same individual are counted separately for federal tax purposes.