law py
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • Who We Are
    • About Our Firm
    • Attorney and Staff Profiles
    • About The American Academy
    • Advantages of Working With Our Firm
    • Speaker Connection
  • How We Help
    • Asset Protection & Business Planning
    • Elder Law & Medicaid Services
    • Estate and Gift Tax Figures
    • Estate Planning Services
    • Family-Owned Businesses & Farms
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Minor Children & Young Adult Planning
    • Pet Planning
    • Remarriage and Blended Families
    • SECURE Act
    • Special Needs Planning
    • Trust Administration & Probate
  • Elder Law
    • Coping With Alzheimer’s
    • Hospice Care
    • Veteran’s Benefits
  • Resources
    • DocuBank
    • Elder Law Resources
      • Elder Law Reports
    • Estate Planning Resources
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Reports
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Frequently Asked Questions
      • Estate Planning FAQ’s
      • Frequently Asked Questions for Families Without an Estate Plan
      • Incapacity Planning FAQs
      • Legacy Wealth Planning FAQ’s
      • LGBTQ Estate Planning FAQ’s
      • Medicaid Planning FAQs
      • Probate FAQ’s
      • Trust Administration & Probate FAQ’s
      • Wills and Trusts FAQs
    • LGBTQ Resources
    • Special Needs Resources
    • Newsletters
    • Trust Administration & Probate Resources
      • Bereavement Resources
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
  • Reviews
  • Contact Us
  • Attend a Free Webinar

Vitt Law Offices, PLC

Helping Other People Preserve Their Wealth

Attend A Free Webinar

Call Now
(434) 971-3025

header-logo
Home » Loaning Family Money – What You Need To Know

Loaning Family Money – What You Need To Know

May 31, 2014 by Vitt Law

Loaning Family Money – What You Need To Know
Written By: The American Academy of Estate Planning Attorneys

People lend money to family members for a variety of reasons. For example, lending your son money to buy his first home, or lending your daughter money to start a new business. At some point, you may find yourself in a similar situation. Therefore, it is important to know how this will impact you from a tax standpoint.

Are you charging the borrower interest on the loan? If so, you must pay income tax on the interest you collect.

If you lend money, despite the fact that a family member is the recipient, the IRS expects you will charge interest, just the same as a bank would. With this in mind, the IRS has set the “Applicable Federal Rate” (or “AFR”), which varies based on the month of the loan as well as the term. A list of Applicable Federal Rates, by the month, can be found by visiting the IRS website.

In the event that you do not charge interest, it is considered a “gift loan” by the IRS, meaning that special rules apply.

Any loan between individuals less than $10,000 is disregarded. If you charge interest less than the Applicable Federal Rate for a loan between $10,000 and $100,000, the difference is considered a gift for which you may have to pay a gift tax if your total gift tax for the year exceeds 14,000.

What if the loan is in excess of $100,000? Not only is the forgone interest considered a gift, but the IRS automatically assumes that the forgone interest was paid to you as interest, meaning that you have to pay income tax on the money.

Say for instance you lend your daughter $200,000 in a five-year interest-free loan with an Applicable Federal Rate of 2.85 percent, the IRS will assume that you received interest of $5,700 each year. Subsequently, you must pay income tax on that amount each year. For someone with a combined 40 percent federal and state income tax rate, the end result would be $2,280 in additional tax each year.

There are ways around this, such as an Irrevocable Trust. You could set up the Trust so the transactions between you and your Trust are not considered income. For this reason, if you lent $200,000 to the Trust, the IRS would ignore the forgone interest when calculating your tax liability. The forgone interest may still be considered a gift, but the Trust can be designed so that the gift to the Trust will be considered a gift to your family member. The annual gift tax exclusion for 2014 is set at $14,000.

Thinking of loaning someone money? Be sure to consult with a qualified estate planning attorney to ensure that your loans are structured in a manner that will not generate additional income taxation.

Primary Sidebar

DOWNLOAD OUR FREE ESTATE PLANNING WORKSHEET

There's a lot that goes into setting up a comprehensive estate plan, but with our FREE worksheet, you'll be one step closer to getting yourself and your family on the path to a secure and happy future.
Address
Texting Permission

SUBSCRIBE TO OUR E-NEWSLETTER

Address
Texting Permission

Where We Are

Vitt Law Offices, PLC
880-A Rio East Court
Charlottesville, VA 22901
Phone: (434) 971-3025

Map

OFFICE HOURS

Monday8:30 AM – 6:00 PM
Tuesday8:30 AM – 6:00 PM
Wednesday8:30 AM – 6:00 PM
Thursday8:30 AM – 6:00 PM
FridayClosed

Footer

  • About The Academy
  • Disclaimer
  • Privacy Policy
  • Sitemap
  • Contact Us
  • Facebook
  • LinkedIn
  • Twitter
Logo

Vitt Law Offices, PLC

© 2023 American Academy of Esate Planning Attorneys, Inc.

© 2023 American Academy of Esate Planning Attorneys, Inc.