personal loans/gift money
pumpkin
and clear, no strings attached; and my mom is lending me $17K, no interest,
to be paid back as I can (probably 10 years). question: do I have to pay
taxes on either of these? one is a "gift" so I guess tax-free because under
$10K, but what about the personal (interest free) loan?
Arthur Kamlet
The gift is not taxable income, and the loan should be documented
and interest should be charged, but unless you default on the loan,
it is not taxable either.
Mark Bole
You: no. However for your mom it's a different story.
The gift from your friend is not taxable to you no matter what the
amount. Unless your investment income for any given year is $1,000 or
less, your mom has foregone (imputed) interest on the loan that she must
report as taxable income. She is giving the forgone interest to you as
a gift, so you owe no tax on it in any case, nor is it a deductible
interest expense for you. Once the loan balance falls below $10K, the
gift loan rules do not apply.
In other words, assuming you have very little investment income
(otherwise why would you need so much help to pay your bills?), your mom
does not have to pay tax on the interest she is "earning" on the loan
and then turning around and giving to you.
On the other hand, if your mom were to simply pay $17K of your
deductible medical expenses herself, and by doing so ended up providing
more than half of your support for the year, it might give her a
significant tax benefit on her Schedule A since you would be a
qualifying relative for medical deduction purposes (but then there would
be no agreement for you to pay her back).
-Mark Bole
pumpkin
but she's also paying some ancillary expenses (I lost income because of time
off).
I do have investments, but they are all tax-sheltered (IRA). and I have a
lot of equity in my house, but she didn't want me to borrow against that.
the money she is giving me was just sitting in a low-interest money market
account. but yes, my investment income is less than $1000 a year if you are
counting taxable income.
pumpkin
>
> The gift is not taxable income, and the loan should be documented
> and interest should be charged,
interest "should be" charged?
who is the arbiter here?
Paul Maffa
"pumpkin" <billo...@att.net> wrote in message
news:2%O1i.146270$VU4.1...@bgtnsc05-news.ops.worldnet.att.net...
>
>>
>> The gift is not taxable income, and the loan should be documented
>> and interest should be charged,
>
> interest "should be" charged?
> who is the arbiter here?
The IRS.
Paul Maffa
> got hit with major medical bills; my best friend gave me about 5 grand,
> free and clear, no strings attached; and my mom is lending me $17K, no
> interest, to be paid back as I can (probably 10 years). question: do I
> have to pay taxes on either of these? one is a "gift" so I guess tax-free
> because under $10K,
Even if the gift exceeded the $12K (not $10K) amount, any taxes would be the
responsibilty of the giver (your friend in this case) not the recipient,
you.
> but what about the personal (interest free) loan?
Loan proceeds are not taxable. However, the Law requires that a reasonable
interest rate be charged and reported as income by the lender. If no
interest rate is stated, the IRS assumes a rate an imputes the income to the
lender.
>
nomai...@hotmail.com
> the Law requires that a reasonable interest rate be charged
That is interesting. Can you cite the statute or regulation?
> If no interest rate is stated, the IRS assumes a rate an
> imputes the income to the lender.
What about so-called "0% interest" loans that retailers sometimes
offer?
I have never believed such advertisements. I always wondered
what the gimmick is. ("If it sounds too good to be true,....")
Paul Thomas, CPA
<nomai...@hotmail.com> wrote
> What about so-called "0% interest" loans that
> retailers sometimes offer?
For starters, they are offered through an arms-length transaction with
unrelated parties. Anything that transpires through such a transaction is
fine.
What they (the IRS) look at is the relationship of the parties involved.
--
Paul A. Thomas, CPA
Athens, Georgia
nomai...@hotmail.com
wrote:
> <nomail1...@hotmail.com> wrote
> > What about so-called "0% interest" loans that
> > retailers sometimes offer?
>
> For starters, they are offered through an arms-length transaction with
> unrelated parties. Anything that transpires through such a transaction is
> fine. What they (the IRS) look at is the relationship of the parties involved.
Please forgive my denseness, but I do not understand the response.
Could you elaborate?
You seem to be saying that if A buys something from B on credit, B can
offer an a "0% interest" loan by relying on C to be the lender. But
doesn't that simply mean that C is lending to A? So why can C offer
0% interest, if indeed the law requires lenders to charge interest?
I probably do not understand who is lending what to whom in that
scenario (or in whatever "arms-length transaction" you envision), or
which parties are at arms-length and why that would make a difference
(other than "because the IRS says so" arbitrarily).
I also do not understand why the IRS, of all people, would the
authority to regulate whether or not interest is charged on loans, not
to mention why any agency would require it.
To my knowledge, the IRS has the authority to dictate the details of
how income is taxed, as well as to define what is and is not income,
within the limits that Congress sets, but not to dictate when someone
must earn income.
So I can see where the IRS might specify the circumstances under which
interest is income for the lender or a deduction for the borrower.
And I can see where the IRS might specify that if a lender claims to
be in the "business" of making loans (and presumably claims business
expense deductions), the lender must show income (presumably in the
form of interest). But I cannot see where the IRS might specify that
a loan, especially a personal loan (i.e. the lender is not in the
"business" of making loans) must result in income (i.e. interest).
(Please note that the OP was talking about a person loan, not a
commercial loan, that is interest-free. I might have clouded the
issue by introducing an "analogy" that involves a commercial loan.)
I understand that things might be the way they are simply because
"that's what the law says". Some people argue that "laws do not have
to make sense". Nonetheless, I am looking for some rationale or
"theory" that would make some sense of it.
Not trying to be argumentative. Just trying to intuit the possible
rationale. Any constructive help would be appreciated.
Paul Thomas, CPA
<nomai...@hotmail.com> wrote
> Please forgive my denseness, but I do not understand
> the response. Could you elaborate?
Gladly. You can't get "a deal" from a family member or other related party
without some tax implications to someone.
If you come to me, or go to the bank to borrow money, it'll be at "arms
length", which means the bank and I have no other purpose than to lend you
money at a rate of interest that; gets your business, is in ralation to your
credit risk, makes business sense to do so, helps generate income of some
amount at some other point in time, etc.
> I probably do not understand who is lending what to whom in that
> scenario (or in whatever "arms-length transaction" you envision), or
> which parties are at arms-length and why that would make a difference
> (other than "because the IRS says so" arbitrarily).
Because all "arms length" transactions involve parties that have slightly
conflicting goals. You want the best deal on interest rates, the lender
wants your business, and wants to make a profit.
The "0%" deals are to get you to buy the product. Therefore there is a
business motive to offer these types of financing. That and it makes great
ad copy.
> I also do not understand why the IRS, of all people, would the
> authority to regulate whether or not interest is charged on loans, not
> to mention why any agency would require it.
Well, state and federal banking laws often apply, as do contract laws, usery
laws and a host of other laws, mostly designed to prevent predatory lending.
In fact, some of the usery laws turn the "interest" into repayments of
principal.
If you can get a disinterested, unrelated party to just "loan" you money
without any expectation of a return on their investment, please let me know.
> To my knowledge, the IRS has the authority to dictate the details of
> how income is taxed, as well as to define what is and is not income,
> within the limits that Congress sets, but not to dictate when someone
> must earn income.
Congress, in fact, has stipulated when someone "earns" income. In your case
Code Section 482 probably comes into play. If the loan amount is deminimus,
under $10,000, inputed interest doesn't apply (Code Section 7872).
> So I can see where the IRS might specify the circumstances under which
> interest is income for the lender or a deduction for the borrower.
> And I can see where the IRS might specify that if a lender claims to
> be in the "business" of making loans (and presumably claims business
> expense deductions), the lender must show income (presumably in the
> form of interest). But I cannot see where the IRS might specify that
> a loan, especially a personal loan (i.e. the lender is not in the
> "business" of making loans) must result in income (i.e. interest).
Congress said so. They wrote all the laws. The IRS just enforces it to the
best of their ability.
The reality is that these loans are never known about, until someone gets
audited.
> (Please note that the OP was talking about a person loan, not a
> commercial loan, that is interest-free. I might have clouded the
> issue by introducing an "analogy" that involves a commercial loan.)
Nope. Commercial loans, like a sale at 0%, "six months same as cash", etc.
carry the same deal on imputed interest as a personal loan would. Part of
the sales price is imputed interest. And all of the "0%" loans are from
retailers who don't offer up that rate for cash, but for you to buy
something from them. Bank loans are at market rates, and they have
stricter rules for employees, officers and shareholders.
> I understand that things might be the way they are simply because
> "that's what the law says". Some people argue that "laws do not have
> to make sense". Nonetheless, I am looking for some rationale or
> "theory" that would make some sense of it.
>
> Not trying to be argumentative. Just trying to intuit the possible
> rationale. Any constructive help would be appreciated.
Hope this helped some.
Ernie Klein
"nomai...@hotmail.com" <nomai...@hotmail.com> wrote:
The gimmick is you are still paying the interest through higher prices.
I have seen many car dealers make such offers, but if you offer to pay
cash they will lower the price or make a cash-back offer (some won't -
those are the dealers to stay clear of). There is no such thing as free
money - somebody has to pay for it.
--
-Ernie-
nomai...@hotmail.com
<paulthomascp...@bellsouth.net> wrote:
> Hope this helped some.
Yes. And I realized another way of answering my own questions -- or
at least a rationalization -- soon after I posted them. (Just got
back to the computer.)
First, for personal loans, a 0% interest "loan" is a gift by
definition. IRS Pub 950 goes so far as to include "reduced-interest"
loans as gifts as well -- presumably only to the extent of the
difference between the reduced rate and the current market rate. I
believe the same is true for the amount of a "forgiven" personal
loan. But I did not double-check.
(Of course, fat chance of any private citizen splitting those hairs
themselves!)
Second, for commercial loans, I can imagine that a lender can offer
reduced rates -- even 0% -- in the same way that a retailer can
discount the price of a product. Can the retail discount be deducted
as a cost of goods sold? Ergo, can a commerical lender?
Presumably, the lender is expecting income from other terms of the
loan agreement, on average. For example, one 0% interest loan
agreement that I looked at reverts to a 24% or more loan if the
borrower misses the due date of a single payment.
As for imputed rates and the code sections that you cite, I presume
you are correct. I will study it further, for my edification.
Mark Bole
> To my knowledge, the IRS has the authority to dictate the details of
> how income is taxed, as well as to define what is and is not income,
> within the limits that Congress sets, but not to dictate when someone
> must earn income.
You're right -- the mom could take her $17K cash and stuff it in a
mattress for ten years. No imputed interest, no taxable income. (Too
bad about inflation, though...)
> I understand that things might be the way they are simply because
> "that's what the law says". Some people argue that "laws do not have
> to make sense". Nonetheless, I am looking for some rationale or
> "theory" that would make some sense of it.
Pub 550 has the closest to a rationale that I think you'll find. The
main theme over and over is "if you are doing this to avoid tax, then it
will be taxable by definition".
For example, the employer who makes a below-market demand loan to the
employee -- without these rules it could be a way to provide untaxed
compensation to the employee (note the lack of arms-length in this
situation).
The exceptions have to do mostly with loans that end up not avoiding tax.
As a side note, I find it interesting that transfers under these rules
are treated as occurring annually on December 31. Now *that* would be
an interesting rationale to find...
-Mark Bole
Paul Thomas, CPA
<nomai...@hotmail.com> wrote
> Second, for commercial loans, I can imagine that a lender can offer
> reduced rates -- even 0% -- in the same way that a retailer can
> discount the price of a product. Can the retail discount be deducted
> as a cost of goods sold?
The revenues are what the revenues are. There is generally not a separate
line item deduction for "discounts" unless the sales are booked at full
price. So, you show a $100 sale and then show a discount of $50 for a
"half-off" sale - OR - you can just show a $50 sale. Whatever company
policy is on that issue is what gets followed.
If you notice that in the larger retailers they may have to enter the
discount code off the coupon, etc to record the discount. Most other times,
if it's a reduced price, ie: "was $100, now $75" is already reduced in the
register to $75, so I suspect the reports show the reduced price as the
sale.
Cost of goods sold is whatever their cost of the product is that's being
sold. It's rarely dependent on the retail price to the consumer. So in
some cases, expecially with obsolete inventory, you may be able to buy it at
less than the retailers cost, which creates a negative cost of goods sold
for that item on their books.
> Ergo, can a commerical lender?
Again, there's not separate deduction for interest not charged. In the case
of a lender, interest income is what it is.