November 6, 2019 - Douglas Myser

Tax problems lending to family. Many people are happy to lend money to their loved ones, especially to children and grandchildren. But before stroking the check, review the tax rules. The tax consequences vary greatly depending on the terms of the loan. A small change in the terms of the loan can men big differences in taxes and penalties. Too often, family loans are informal arrangements. They don't carry an interest rate or have a payment schedule. They essentially are demand notes. Payment isn't due until the lending parent or grandparent demands it, and that's not likely to happen unless the lender's financial situation changes adversely.  Tax problems lending to family.

That runs afoul of the tax rules. In a family loan, when there is no interest rate or a rate below the IRS determined minimum rate, the interest that isn't charged is assumed to be income to the parent from the child. In other words, there is imputed interest income or phantom income. The parent is to report interest income at the IRS determined minimum rate as gross income, though no cash is received. The borrower might be able to deduct the same amount if they qualify for the mortgage interest deduction. In addition, the lending parent or grandparent is assumed to make a gift of the imputed interest to the borrowing child or grandchild. In most cases, the annual gift tax exclusion is more than sufficient to prevent the gift from having any tax consequences. In 2019, a person can make gifts up to $15,000 per person with no gift tax consequences under the annual gift tax exclusion. A married couple can give up to $30,000 jointly.

To avoid these IRS tax consequences, there should be a written loan agreement that states interest will be charged that is at least the minimum interest rate determined by the IRS for the month the agreement was signed. You can find the minimum rate for the month by searching the internet for "applicable federal rate" for the month the loan agreement was made. Tax problems lending to family.

If you loaned money to a relative and were never paid back, and can't pay your taxes as a result, you may qualify for Tax Relief. Our Tax Resolution Company is 36 Years old and Nationwide. Our Tax Resolution has spanned over 36 years, is Nationwide, and we helped change the business model of how fees were charged in this industry. If you have unfiled tax returns we can file them, then give you options for dealing with your tax debt, including the IRS Fresh Start Program,  and all options outside of that program. Our Tax Resolution Services also include Tax Court for those who need to dispute the validity of a IRS Assessment. Call prior to a IRS Wage Garnishment, so we can help you determine your Tax Relief options. 1-888-689-7861.