In general, if you give property, money or anything of value to another person, you the giver are subject to gift tax. There are several exceptions to this tax.

Each year, each person can give a certain amount to one or more persons without incurring gift tax. In 2007, this so-called gift tax exclusion is $12,000 per recipient. If you are married and have two children, for example, you and your spouse combined can give each child up to $24,000 a year free of gift tax. This limit is indexed for inflation, but only in $1,000 increments

Other exceptions: Spouses can give each other any amount of money without incurring gift tax. Gifts to political organizations or qualified charities are not subject to gift tax. If you pay someone’s medical expenses or tuition, that amount is not subject to gift tax, but the payment must be made directly to the institution. The exclusion applies to private school tuition for lower grades as well as college tuition.

Even if you give amounts that are subject to gift tax, you won’t owe tax immediately. On top of the annual exclusion, each person has a lifetime gift tax exclusion of $1 million. If you make a gift that is taxable suppose you give $15,000 to your nephew in 2007 --- $3,000 will be deducted from your $1 million lifetime exclusion. Only after you have given more than $1 million in taxable gifts will you start paying gift taxes. However, the $1 million gift tax exclusion is included in the estate-tax exclusion, which is $2 million per person through 2008. If you gave $1 million in taxable gifts, your estate tax exclusion would drop by $1million.

Gifts are not tax-deductible unless they are to a qualified charity. Recipients are generally not taxed on gifts.

For more, see http://www.fairmark.com/begin/gifts.htm and http://law.freeadvice.com/tax_law/gift_tax_law/.