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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10437
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Taxpayer loaned son $500,000. 5 yrs ago. No interest or principal

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Taxpayer loaned son $500,000. 5 yrs ago. No interest or principal paid in the 5 yrs. What are the income & gift tax implications assuming an int. rate of 4%(not paid). Taxpayer wants to forgive int. & princip. in 2013.

NPVAdvisor :

Exclusion of gift and estate tax is $5,250,000 for 2013, so it my be most efficient simply to do a gift tax form for 608,326 (500,000 @4% for 5 years compounded annually). THis would exclude any income for the son, and retain 4.6 mil estate exemption for Taxpayer

NPVAdvisor :

Taxpayer would simply file a form 709, gift tax form

NPVAdvisor :

Aldo, as a product of TRA (fiscal cliff deal) exemption amount will continue to index (made permanent)

Customer:

Why is there no interest income to the taxpayer? Didn't he receive the interest and gift it back to the son?

NPVAdvisor :

I was going to mention that. IRS would say that this was a below market loan and that there should have been imputed income in the amount of at leasr AFR (Applicable Federal Rate) to the Creditor

NPVAdvisor :

However, you can capitalize that interest

NPVAdvisor :

That's what you'd be ding by gifting the total amount

NPVAdvisor :

cleans it up

Customer:

How do you capitalize the interest?

NPVAdvisor :

A loan instrument on hand that says that interest not paid would be capitalized (added to the loan)

NPVAdvisor :

That's why I compounded the number

Customer:

ok. Got it. Thanks.

NPVAdvisor :

YW

Lane and other Tax Specialists are ready to help you


Thanks much!

Lane