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Are there any tax implications either state or federal for a…

Hello are there any tax...
Hello are there any tax implications either state or federal for a family member giving another family member a loan. Are there any documents that need to be in order besides a contract?
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Answered in 1 hour by:
1/9/2018
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
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There are no tax implications for the loan itself. You would want to make sure that there is a promissory note documenting the loan. There would be some implications if interest is paid on the loan or if the loan becomes uncollectible. How large of a loan is it?

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Depending on the size of the loan there is the possibility that imputed interest would need to be calculated.

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Customer reply replied 5 months ago
$50k is the loan amount.

Is any interest being charged on the loan?

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Customer reply replied 5 months ago
4.25%

That is higher then the required rate that you need to charge. The lender would need to report the interest paid on their individual tax return.

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Customer reply replied 5 months ago
Missing something here when you said: ......"That is higher then the required rate that you need to charge. The lender would need to report the interest paid on their individual tax return."
Family 1 is lending the loan, they have to pay interest to the bank.
Family 2 is receiving the loan.
4.25% was an estimate. I guess it would be Prime + .
Please explain if there would be any tax consequences. Thanks.

Family 2 is essentially paying the loan from the bank. Is this correct?

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Chad EA, CFP ®
Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional
Category: Tax
Satisfied Customers: 2,499
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Hello, I see you requested my services.

Tax implication of a loan between family members would be the pay back of any interest paid for the $50,000 loan.

___

If the loan of $50K is charged a rate of 4.25% annually and the loan is intended to be paid back in 10 years then interest paid in the first year is $2,124.

___

To report this income, the borrower who pays the interest completes a Form 1099-INT and submits one copy to the lender and one to the IRS.

___

Additionally, you may charge any interest rate you desire, however the rate should be a reasonable market rate so as not to be viewed as a gift but as you intended, a loan. Additionally, you should include a written agreement with a pay back schedule.

This will help you in the future if the family member does not pay you back the loan in full.

Please let me know if this has answered your question.

Thank you!

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Customer reply replied 5 months ago
Thank you for the straight forward answer. What method, app, or link do you like to calculate the interest as you did in the above example?
Also to be clear, the family member that loans the money to the other family member needs to charge interest in order for the "loan" not to appear as a gift?
Are there any other special IRS forms, besides the agreement, needed in order to show this is indeed a loan and not a gift in the event of an audit?
Thank you.

I use my financial calculator.

Bankrate also has a financial calculator. After you input the rate, amount and payment period, click calculate and then view the "amortization or payment schedule" for a break down of principal and interest for each payment.

https://www.bankrate.com/calculators.aspx

____

From an IRS Perspective the issue of a loan vs a gift generally only comes into play when the lender is not paid back by a family member. If you want to give a interest free loan you may and there will be no tax implication. However, if you aren't paid back you will not be able to deduct the loan as a bad debt because the IRS will view the loan as a gift. - Please let me know if you have questions about this

There are no special forms. The loan merely needs to have the elements of a bona fide loan. Such as written and enforceable. Arms length transactions include a market rate interest charge and a payback schedule.

Chad EA, CFP ®
Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional
Category: Tax
Satisfied Customers: 2,499
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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