Each year in America citizens give millions to charity foundations and to each other. Parents or grandparents pass on and leave money and real estate to their family or friends. Religious people tithe 10% of their income to their church; college research departments receive grants and private donations, the list of places to give "gifts" to is endless.
A gift tax credit is a way the federal government gives citizens a "break" on their taxes. If you decide to give one million dollars to your son, he must pay a tax on the money he receives. However in 2001 Americans received a "credit" against the federal gift tax of $220550 dollars. While your son will still have to pay taxes on part of his gift if a wife gives half and a husband gives half, the son receives a total of $675,000 tax free from his parents. In 2009 the total amount given under the gift tax credit can equal 3.5 million dollars- tax free.
What amount smaller gift tax credits. That is wonderful if people are in the position to "gift" someone else 2 million dollars, but most of us are not in that position. If a person "gifts" less than $13000 dollars to any one individual, that individual does not need to pay tax on it. So if mom and dad send their son $1000 a month, he is fine on taxes- it is considered a gift, not income, and is tax exempt. However as soon that amount goes over $13000, even by a single dollar, there are strict guidelines and specifications to follow.
This is different for the individual verses the organization though. If mom gives her son $13,001 the son has to pay tax on it. If mom gives her church (or any other tax exempt organization) $13,001, there is no tax on that organization. This only applies if the organization is tax exempt though.
There is a way to give more and still not pay tax on it though. If a couple (mom and dad) both give $13,000 to their son for a total of $26,000, the son does not have to pay taxes. However the money must be given individually. This is all thanks in part to the federal gift tax credit. If you are planning on giving, check the federal laws though as they change often- it might be the difference between paying tax and not paying tax.