I am making an interest-free loan to my daughter. Technically, I believe the IRS requires that I consider the some amount of interest at some rate as a gift. Right?
How do I determine the appropriate interest rate to use?
Would I use an interest rate that is "typically" offered for a loan in our area? Even so, what type of loan rate would I choose?
Or would I use an interest rate that I would expect to earn if I had left the money in, say, a regular savings account or CD?
I know I do not need to worry about this unless the interest per plus other gifts might exceed $24K per year (MFJ).
But I am still interested in knowing the answer, for my edification, as well as to ensure that I do not exceed the $24K limit.
The chart is fresh (good thing) but the wording here is vague (bad);
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The rates I'd suggest using are in the first chart, and are .81 for short term, 2.06 mid-term, and 3.57 for a long term loan. By the way, the gift limit has been increased to $13K/yr, so for you and spouse, $26K is your limit. If your daughter is married, $52K to gift from both of you to both of them. That turns into a pretty large amount of money, even if it's just her.
(For anyone else attempting to answer this - I googled on this topic, and searched through the IRS site. I found many references to "Applicable Federal Rate (AFR) and searching on that led me to the IRS link above.)
Thanks. I wasn't aware of that. I don't see that information in the online IRS Pub 950, which is still the 2008 version.
Thanks for the pointer. I have some follow-up questions, if I may; mostly just curiosity.
Is this (i.e. how to determine imputed interest rates for interest- free loans) discussed in any IRS Pub or other "normal" public document?
I'm just wondering how a "mere mortal" like myself is expected to learn this information.
The AFR tables show essentially the same interest rate for annual, monthly, et al for short-term loans. Are those all "annual rates"?
For example, for short-term monthly compounding, the Dec 2008 rate is 1.36%. I assume that does not mean 1.36% per month (17.60% APR). Right?
Even so, is the "monthly" rate of 1.36% a simply interest rate, or is it an APR? That is, is the actual monthly rate 1.36%/12, or is it (1+1.36%)^(1/12)-1 (RATE(12,0,-1,1+1.36%) in Excel-speak)?
Finally, my __real__ question: what amount is actually considered the gift amount?
Consider this example: a 25-month of $100,000, to be paid back interest-free in equal payments of $4000 each. The loan origination date is in Dec 2008.
According to
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(see below), we should use the short-term AFRs. The annual rate is 1.36%, if my assumption in #2 above is correct. (Note: The following figures assume 1.36% in the annual interest rate, not the APR.
(Also, I assume that it is correct to use the AFR as of the loan origination date as a fixed interest rate. Right?)
For the equivalent amortized loan with no balloon payment, the monthly payment would be about $4036, and the interest paid each year would be about $1064, $411, $5 (= $1480 total).
On the other hand, the difference in total payment each year between the amortized loan and interest-free loan would be $720, $720, and $40 (= $1480 total).
So in the 1st year, would the gift be $1064, or would it be $720?
That's great, if you know what to look for in the first place. I didn't. But once you mentioned it, it occurred to me to google "imputed interest rate" (without quotes). One search result points to
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points to similar information. Thanks again for the pointers and information.
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