As a bankruptcy lawyer I often encounter people, who borrow funds from friends or relatives to try to get through tough financial times. Seldom do people in this situation consider charging interest on these loans. Under the tax law however loans with below market interest rates between such individuals are considered gift loans. In this situation the tax law will consider that the lender is earning interest at the applicable federal rate. He will then have to pay income taxes on this imputed interest. He will also be considered to be making a taxable gift by not collecting the interest.
Fortunately these rules only apply to large transactions, and very few loans between family members fall into this trap. The rules do not apply to most loans of $10,000.00 or less. Also on loans of $100,000.00 or less the amount of interest imputed will be limited to the borrower’s net investment income, and nothing will be imputed, if the annual investment income is not more than $1,000. The rules are thus principally designed to stop individuals from avoiding taxes by lending funds to poorer relatives, who then turn around and invest the money, but pay a lower rate of tax on the dividends and interest they earn.
No comments:
Post a Comment