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socrateaser
socrateaser, Lawyer
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Our daughter is repaying us for her under graduate and graduate

Resolved Question:

Our daughter is repaying us for her under graduate and graduate college expenses (tuition, books, room and board, etc). Is this to be considered taxable income and reported as such? She is paying tax on this money.
Submitted: 3 years ago.
Category: Tax
Expert:  socrateaser replied 3 years ago.
How much are we talking about here?
Customer: replied 3 years ago.
She is paying us about $800 a month at this time. The cost of her education was about $700,000.
Expert:  socrateaser replied 3 years ago.
Seven hundred thousand dollars? Alrighty then..

Based on your alleged facts, you would be imputed interest income at the federal long-term rate in effect on the date that the loan was originated, compounded semiannually. The amount of the loan is the excess of the amount transferred divided by the present value of the amount transferred. IRC 7872(b)(1).

If the federal long term rate were 3.25% on the date of transfer of the loan proceeds, then that means you would have transferred about $432,000. Of course, you must have made loans at various times over a long period of time, so as a practical matter, this will not work.

If your goal here is to set up and report income on the loan payments, then you may want to consider having your child sign a promissory note with definite and certain terms. That way you wouldn't have to deal with the incredibly complicated vagaries of trying to figure out when each loan was made, and what the interest rate was at the time.

Then you would report the interest based upon the note as income, and that would be the end of the matter. However, $800 is not a realistic loan repayment for a $700,000 debt, unless you have a balloon payment at some reasonable future date. Otherwise, the loan duration would probably be in the neighborhood of 80 years.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!

Customer: replied 3 years ago.
There is no interest on this loan and yes the repayment amout is minimal compared to the cost of her education. However the question is NOT about the loan, but about reportable, taxable income. Are we to report the $9600 loan repayment as income and pay tax on that amount. We do not care if the loan is repaid. She insists on doing this. She is paying tax on her income.
Expert:  socrateaser replied 3 years ago.
If you are not expecting repayment, then your original payments were a gift, and her payments back to you are also gifts. As long as she does not pay more than $13,000 to you per year, neither you nor she need report the transaction or pay taxes on it.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34818
Experience: Retired (mostly)
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