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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 9769
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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In reference to question you answered about a year ago

Customer Question

In reference to question you answered about a year ago regarding interest paid to family members who are Non-Residents of the U.S. (Mexican), you stated that U.S. citizens have to withhold funds and they have to file a NR-return (I am assuming 15% for Mexico). I found the following information:
26 U.S.C § 6049
(1) General rule For purposes of subsection (a), the term “interest” means—
(A) interest on any obligation—
(not applicable)(i) issued in registered form, or
(not applicable)(ii) of a type offered to the public,
other than any obligation with a maturity (at issue) of not more than 1 year which is held by a corporation,
(not applicable)(B,C,D,E,F) ...
may be (G) to the extent provided in regulations prescribed by the Secretary, any other interest (which is not described in paragraph (2)).
However P2 states:
(2) Exceptions-For purposes of subsection (a), the term “interest” does not include—
(A) interest on any obligation issued by a natural person..
is there an exception for income payable to non-residents in the regulations, I cannot find such exception.
Can you help?
Facts below
There are 5 siblings in a family. 3 of the siblings live in Mexico and are Mexican citizens. 2 siblings live in the US and are US citizens. 1 of the Mexican citizens is mentally disabled and is cared by the family. This person has property in Mexico too. A couple of family investments were liquidated and some of the funds were loaned to all the siblings to pay off regular debt. The siblings have decided to return those funds to a fund that can be used to support the future living expenses of the sibling with a disability. However, since last year the 2 U.S. citizens have agreed to receive funds and pay a contribution, which could be considered interest, in the repayment of such loans. The owner of the funds is ultimately the Mexican citizen, but she has not received actual payments. Instead, the payment of the funds has gone to cover some of the father of siblings’ debt, who until now has acted as the executor of the owner of the funds or to other members of the family who have borrowed funds from payments. Furthermore, the sibling also has debt to Mexican credit issuers that assess interest on a portion of the funds that is being used as loans to U.S. siblings. Total amount of loans is 100,000 USD. Interest accruing at 6%
Need help with U.S. determining reporting requirements for the interest being paid to the Mexican sibling, tax withholding or liabilities for US citizens making interest payments to non-us residents.
Curve ball: Payments have been made to Father's insurance policy totaling $3600 for the year. No payment has been issued to sister yet, but continues to accrue
Submitted: 7 months ago.
Category: Tax
Customer: replied 7 months ago.
Please don't share my question publicly
Expert:  Lane replied 7 months ago.



Looks like no one's picking this up. I'll try to help here.


I'm not sure I followed everything you said there, but I'm not sure it's necessary ... how money is being used isn't the issue (UNLESS you are talking about an expense that may be deductible), and for expenses to be deductible, they must either be (1) primary or second home mortgage interest OR (2) a business loan.


It doesn't appear that this is either of those.


Next we look at what may be taxable, and interest PAID is not taxable (only deductible, in the two ways I mentioned above)


That leaves what appears to be the core of your question"Need help with U.S. determining reporting requirements for the interest being paid to the Mexican sibling, tax withholding or liabilities for US citizens making interest payments to non-us residents."


You can receive a loan from a NRA family member
You will have to do withholdings of 30% of the interest and deposit with IRS at the time of payment of that interest (UNLESS you get the NRA receiver of the interest to give YOU - this is not filed - but kept in your records - a W-Ben to show that the reduced withholding of 15% applies).

I can pay interest annually to my family members and at that time pay the IRS ( it does not have to be monthly or quarterly withholdings but only when interest is paid)

You could ALSO give tax free gifts to my family members not to exceed the limit of $14,000 per year per family member. (If filing jointly, that amount can be 28,000 per family member.

you can repay loan to the family member at any time ... and as long as you withhold the tax and pay in the NRA's responsibility for the tax on the interest has been paid by withholding at the source, which means that they do not have to file a 1040-NR.

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