Family is always there for each other, and sometimes that aid comes in the form of borrowed cash. These little transactions are usually done under the table, but at what point does the IRS start to care? Discover the truth about whether or not family loans are safe from tax consequences before seeking valuable financial advice from A. Roberts & Associates!
Taxes are only considered with family loans exceed a certain amount, and at that point, it needs to be legalized with the appropriate documents:
Is It Appropriate To Legalize Loans To Family Members?
Do you have a sibling or cousin who likes to make a habit of borrowing twenty bucks every now and then? Even if you agree to these small loans every time, it’s probably not enough to warrant getting these transactions on paper. Larger sums, like the amounts that you would loan from the bank, are the ones that should be legally managed. Some examples of family loans that would involve substantial numbers include:
- Student loans
- Credit card payoffs
- Auto loans
- Medical loans
| What If My Family Tries To Skip A Payment? Another benefit to legalizing a family loan is to ensure that the borrower pays on time every time. This also protects you as the lender since any missed payments won’t be mistaken as a monetary gift that can be taxed. And if you’re the kind of person who doesn’t like confrontation, this can be an easy way to avoid any unpleasant arguments. |
Why You Should Be Charging Interest On Family Loans
Part of legalizing a family loan is charging interest. This may seem a little harsh considering that the borrower could be a close loved one, but there could also be repercussions for avoiding interest on loans over a certain amount. For substantial loans, the IRS could mistake the lack of interest charges as a “gift” on the lender’s part, and so the amount that would have been charged as interest can be taxed as you would a monetary gift.
At What Amount Does The IRS Step In With Family Loans?
We’ve been talking about what happens with substantial family loans, but exactly how much is a lot? The IRS starts to take notice when family loans are over $10,000. Anything over this amount is when you should really be considering getting the transaction in writing and charging interest.
What If The Borrower Is A Child?
When it comes to kids, the IRS is a bit more lenient. They still won’t interfere as long as the loan is under the $10k threshold, and they also don’t pay mind to other aspects of the loan such as any interest that may be charged, how often or how many loans are lent out, and if the loan has been paid in full.
| Family Loans That Are Tax-Safe To review, family loans that are free from being taxed include loans that are under $10,000. There is one exception: these loans can’t be used for stocks, investments, or anything else that is directly used for the sole intention of turning a profit. |
Loan Out Money The Right Way. Look To A. Roberts & Associates For Guidance!
For the safest way to give out a loan to your family with minimal risks or taxes, reach out to A. Roberts & Associates today to schedule a consultation! We will help you navigate the rules and regulations set by the IRS and devise a plan to help you save on taxes.