Mother made two loans to son money in 2007 at interest rates that equaled or exceeded the AFR. (One loan called for interest to be paid annually, the other quarterly.) In 2011, Mother forgave the loans and about $50,000 in accrued interest. (Son never paid any interest on either loan.)
The entire amount forgiven (loan principal and accrued interest) is then a gift. Does the mother have to declare the $50,000 as interest income?
The loans were not specifically for any business venture and were unsecured.
Every year you get a gift tax exclusion of 13k this year (2012) and 12k in 2007
-- meaning you can give this amount to any person tax-free to anyone, or double that if married, or possibly quadruple that if the person you're giving to is also married. So the amount of gift on which you are liable for tax is original loan - exclusion amounts from 2007 to 2012. However, I don't know if the loan has to be structured this way from the start. You can use up your lifetime exemption of $5 million (set to be reduced to $1 million in 2013) or pay the gift tax on form 706. Gift tax rates are high -- I think a flat 35% but am not sure.
Regarding the interest, I think you can either gift them that amount and they can give it back to you and you report it on your Schedule B, or you can write off the debt as a non-business bad debt on Schedule D and issue them a 1099-C, and if they're bankrupt then then 1099-C income is not taxable to them. But I'm not sure, and nor do I know how to deal with the fact that the interest was accrued rather than dealt with year by year.
There is also a bizarre $100,000 rule, on loans less than this amount but more than $10,000, which reduces the amount of imputed interest. But it doesn't apply to you as you charged the applicable federal rate, and the loan seems to be more than 100k.
2007 -- meaning you can give this amount to any person tax-free to anyone, or double that if married, or possibly quadruple that if the person you're giving to is also married. So the amount of gift on which you are liable for tax is original loan - exclusion amounts from 2007 to 2012. However, I don't know if the loan has to be structured this way from the start. You can use up your lifetime exemption of $5 million (set to be reduced to $1 million in 2013) or pay the gift tax on form 706. Gift tax rates are high -- I think a flat 35% but am not sure.
can give it back to you and you report it on your Schedule B, or you can write off the debt as a non-business bad debt on Schedule D and issue them a 1099-C, and if they're bankrupt then then 1099-C income is not taxable to them. But I'm not sure, and nor do I know how to deal with the fact that the interest was accrued rather than dealt with year by year.
than $10,000, which reduces the amount of imputed interest. But it doesn't apply to you as you charged the applicable federal rate, and the loan seems to be more than 100k.
The mother is married but to an NRA. (She doesn't live in the US these days.) Gift splitting isn't available. Son is now divorced. She has given the maximum annual exclusion every year in cash, so this gift is on top of the $13,000. The two demand notes stated that the interest was to be paid quarterly on one, annually on the other.
In summary, my guess is that the accrued interest is not taxable income to the mother, but is a taxable gift upon forgiveness. Right?
Speaking just to the gift tax. There would still be no tax due. The mom has a lifetime exclusion she'd just tap into for the year. Form needs to be filed but no check written.
I'm afraid I disagree with the majority of the group. In my opinion, the interest is taxable to the mother (whether as due or in the year forgiven is not clear). The entire amount (current year's interest plus principal, but possibly not the previous years' interest) is a current gift. (If it was taxable in prior years, it would probably be a current gift in that year.)
Consider, in the alternative, the mother didn't charge interest, so interest at the AFR would be taxable to the mother and a gift to the son. Just because there was a stated interest rate, it doesn't seem reasonable that Congress or the IRS would allow a different result if the loan was forgiven.
Regardless, there is probably no current gift tax due; the gift being considered to have been made as the interest was due would be favorable, as each year's $12-$13K exclusion could be used.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.