I know that if you don't have enough interest on a loan to a family member the IRS will input the interest. What is the minimum acceptable?
- posted
8 years ago
I know that if you don't have enough interest on a loan to a family member the IRS will input the interest. What is the minimum acceptable?
You must use the AFR (applicable federal rate) published each month in an IRS Revenue Ruling. See the link below for the August 2015 published rates. The rate you want will come from Table 1. There is a short term rate (loans for a period up to 3 years), mid-term rate (loans over 3 and not over 9 years) and long term (over 9 years). Each rate is expressed for a payment period of either monthly, quarterly, semi-annually and annually.
E.g., if you loan your brother an amount of money in excess of $10,000 in August 2015 for 5 years and he will pay you back monthly, the rate needs to be 1.8%. Anything less than that and the IRS will tax you as if you received 1.8% and any amount not received because the interest is too low, will be considered a gift from you to him and subject to the gift tax rules (e.g., you can gift up to $14K annually to any person).
LMGTFY:
So, as long as the required interest is under $14,000 and there are no other gifts, then it can just be ignored as a gift under the minimum required to be reported? Well, that is easy enough.
Not exactly. The lender must still report the required interest as income.
-- Arthur Rubin CRTP, AFSP, in Brea, CA
So if say no interest is paid on a $100,000 loan, then income tax has to be paid on $1,800 of imputed interest AND a gift of $1,800 was made? Is that it (approximately...)?
On a mid-term loan that has no interest payments, I believe the IRS uses the annual rate, not the monthly rate. So.... you are correct, but the amount would be $1820 (1.82%).
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