What is the biggest urban legend in the area of taxation? If you answered ďthe gift tax,Ē score one for the home team.

What is the biggest urban legend in the area of taxation?

If you answered ďthe gift tax,Ē score one for the home team.

The most common phone call received by tax professionals involve inquiries from parents or grandparents about whether or not they will have to pay gift tax on their monetary gifts. Adult children and grandchildren call to ask about whether they will have to pay a tax on gifts received. [Lots of hand-wringing going on]

Like the urban legends that struck fear in many of us as youngsters, the dark, scary world of gift taxes does the same to adults. One person whispers a rumor of a gift tax nightmare that some other person experienced and the urban legend grows and grows.

People fear the gift tax simply because they donít understand how it works.

Knowledge conquers fear: Demystifying the gift tax

The gift tax is a real tax. You donít necessarily need to pay it, but there are a number of rules surrounding this inconvenient tax.

First, any person can gift any individual up to $14,000 in 2014 and have no obligation to report it to the IRS. So mom and dad can give a combined $28,000 to their favorite child without creating any new filing requirements for themselves. But, if mom and dad gift little Johnny anything above that amount Ė even $28,001 -- they will need to file a gift tax return with their annual tax return.

Filing a gift tax return does not mean that these generous parents will automatically have to pay a gift tax (yes, the IRS assesses the gift tax based on the giverís financial circumstances), but they will have to file the return. In fact, an individual owes no gift tax until he or she gives away the lifetime exclusion amount.

So whatís the lifetime exclusion amount?

For 2014, the lifetime exclusion amount is quite generous at $5,340,000! If you give away more than that, then you will owe gift tax Ė assessed at the whopping rate of 40 percent. This means that for the average taxpayer, fear of having to pay a gift tax represents an unfounded worry. You donít need to add unnecessary sources of stress to your life.

Every rule has its exception (or two)

In some situations, you may not have to file a gift tax return even if you give over the annual limit.

Letís suppose your favorite Aunt Martha is very sick and out of the goodness of your heart, you decide to pay her medical bills. No gift tax return is required, even if the amount exceeds $14,000. However this exception comes with an important caveat Ė you must pay the medical provider directly. If you give Aunt Martha the money and she then chooses to use it to pay her medical bills, youíll need to file a gift tax return if the amount exceeds $14,000.

Another exception involves gifting money for higher education costs (i.e. college tuition). So, letís say you decide to pay little Scarletís university tuition. You wonít need to file a gift tax return, even if the amount exceeds $14,000. But just like the example with Aunt Martha above, youíll need to pay the money directly to the university. If you write young Scarlett a check for her tuition and the amount exceeds $14,000, youíll need to file a gift tax return. By making payment directly to the educational institution, you can gift an unlimited amount of money with no obligation to file a gift tax return, or pay gift tax on it in the future.

Now you know the facts, so stop living in fear and embrace your desire to gift money to your loved ones. Unless you are giving away more than $5,340,000 you will not owe any gift tax.

Even so, any time you plan to give away large amounts of money, itís wise to consider sitting down with a qualified tax professional. He or she may know of some legal ways to avoid the 40 percent rate on taxable gifts.

Brian Eisenmenger is a certified public accountant and founder of Eisenmenger & Co. CPAs in Wheaton, Ill. Brian has extensive experience in income tax preparation and financial consulting, including trust and business planning and management services. In addition to his practice, Brian is a frequent speaker on tax and accounting topics throughout the United States for Thomson Reuters.