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Interests on the loans to my son and wife

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truthman

Member
What is the name of your state? Florida
Since 2015, until 2019, I have been giving loans separately to my wife and our adult son. I have been filing joint tax returns with my wife.

In 2015: I gave $20,000 loan to my wife, and $14,000 loan to son.

In each of the years 2016, 2017, 2018, 2019, I gave the same amount of loan to my wife and son (i.e., $20,000 loan to wife, and $14,000 loan to son).

Now they want to pay back the loan to me. I read somewhere that, if we both agree, I need not collect and need not report any interest on the loan I gave to my wife. That is, if we both agree, my wife can simply pay back the principal (which is $100,000 total) and we need not report this matter anywhere in the tax returns. Is this correct?

For the loans I gave to my son, although I do not want any interest, I heard that there is some minimum interest I must collect to prove that it is a loan but not a gift? Could someone tell me the minimum interest rates for the years 2015 to 2020 my son must pay? I never reported this loan to IRS or in my tax returns. If my son pays back the loan now (along with that required minimum interest), and I report that interest in my 2020 tax returns, is it enough to prove (for IRS tax purposes and any other legal purposes) that it was a loan (not a gift) paid back?

In 2015, 2016, 2017, 2018 and 2019, my wife gave some loan and some gift to our son, from her personal account. If she wishes to forgive those loans (never collects that loan back) , will it be counted as if I am also involved in that forgiving (I cannot forgive any loan due to some legal issues I am facing from someone else).
 


zddoodah

Active Member
Yes, you are free to waive and not collect interest.


For the loans I gave to my son, although I do not want any interest, I heard that there is some minimum interest I must collect to prove that it is a loan but not a gift? Could someone tell me the minimum interest rates for the years 2015 to 2020 my son must pay?
The first sentence that ends with a question mark is not a question, and the second one is based on a flawed premise. Where did you "hear[] that there is some minimum interest [you] must collect to prove that it is a loan but not a gift." And to whom do you think you might need to prove it?

Please elaborate what your concern is.
 

davew9128

Junior Member
The first sentence that ends with a question mark is not a question, and the second one is based on a flawed premise. Where did you "hear[] that there is some minimum interest [you] must collect to prove that it is a loan but not a gift." And to whom do you think you might need to prove it?
You mean the imputed interest rule under IRC 7872?
Next time you accuse someone of a flawed premise, be right about it.
 

zddoodah

Active Member
You mean the imputed interest rule under IRC 7872?
Next time you accuse someone of a flawed premise, be right about it.
How about the next time you decide to be an antagonistic jerk, don't?

The premise was that the OP "must collect [interest] to prove that it is a loan but not a gift." The provision of the IRC does not require the collection of interest (for purposes of proving anything or otherwise). It simply sets forth presumptions and treatment if interest is collected. Also, there's a reason why I asked the questions I asked.
 
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LdiJ

Senior Member
What is the name of your state? Florida
Since 2015, until 2019, I have been giving loans separately to my wife and our adult son. I have been filing joint tax returns with my wife.

In 2015: I gave $20,000 loan to my wife, and $14,000 loan to son.

In each of the years 2016, 2017, 2018, 2019, I gave the same amount of loan to my wife and son (i.e., $20,000 loan to wife, and $14,000 loan to son).

Now they want to pay back the loan to me. I read somewhere that, if we both agree, I need not collect and need not report any interest on the loan I gave to my wife. That is, if we both agree, my wife can simply pay back the principal (which is $100,000 total) and we need not report this matter anywhere in the tax returns. Is this correct?

For the loans I gave to my son, although I do not want any interest, I heard that there is some minimum interest I must collect to prove that it is a loan but not a gift? Could someone tell me the minimum interest rates for the years 2015 to 2020 my son must pay? I never reported this loan to IRS or in my tax returns. If my son pays back the loan now (along with that required minimum interest), and I report that interest in my 2020 tax returns, is it enough to prove (for IRS tax purposes and any other legal purposes) that it was a loan (not a gift) paid back?

In 2015, 2016, 2017, 2018 and 2019, my wife gave some loan and some gift to our son, from her personal account. If she wishes to forgive those loans (never collects that loan back) , will it be counted as if I am also involved in that forgiving (I cannot forgive any loan due to some legal issues I am facing from someone else).
Have you discussed all of this with a local attorney and a local tax professional? Have you gotten advice anywhere besides the internet?
 

Zigner

Senior Member, Non-Attorney
Thanks for your inputs. I am facing a civil lawsuit since 2014 and it is still going on and is coming to an end. If I lost the lawsuit, my wife and son should not be dragged to fraudulent transfer claims http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0700-0799/0726/0726.html therefore I am collecting those loans back from them.
"imputed interest ...?" yes, thank you, that is the one.
Interesting. The action(s) you are contemplating taking further implicate you. You really need to run your plan by your attorney in this matter.
 

truthman

Member
Thanks for your inputs. Yes sir, I talked to an attorney (I paid him but did not and could not hire) and he said that giving and collecting a loan is not fraudulent transfer under fraudulent transfer law 726.105 and 726.106 if the loan is paid back to me by the time the judgment creditor come for collection or else the judgment creditor will go after my son and wife using 726.105 and 726.106 to collect it. However, that attorney has little or no knowledge about tax issues therefore I am contacting this forum. My wife and son are not a party in that lawsuit. I am an old person with many health issues and needs a heart surgery also, and want to use that money (which I earned from my job) which is loaned to my wife and son, for my medical treatment, once the loan is paid back. Your advice will really help.
 

Taxing Matters

Overtaxed Member
Now they want to pay back the loan to me. I read somewhere that, if we both agree, I need not collect and need not report any interest on the loan I gave to my wife. That is, if we both agree, my wife can simply pay back the principal (which is $100,000 total) and we need not report this matter anywhere in the tax returns. Is this correct?
You are not required to collect interest from her. But when you make a below market loan — in this case a gift loan — the tax law imputes interest that you must include as taxable income anyway. On loans between individuals imputed interest is not imposed when the total amount of such loans was $10,000 or less. If amount of the loans totaled $100,000 or less then the amount of interest that is included in income is limited to your net investment income for the year. See IRS Publication 550 starting on page 6 for a more complete discussion of the treatment of below market loans. Imputed interest would be imposed on under IRC 7872 and would need to be reported on your income tax return. Note that interest rates have been so low in recent years that the imputed interest here won't be a lot.

For the loans I gave to my son, although I do not want any interest, I heard that there is some minimum interest I must collect to prove that it is a loan but not a gift?
Same thing here. You don't have to collect the interest, at least for tax purposes. But you may have imputed interest to include on your tax return.

As far as proving to a court that these were loans and not gifts should the creditor seek to characterize these as gifts and try to go after them for the money under a fraudulent conveyance statute, it would be best if you had formal loan contracts that were executed at the time the loans were made, the loan contracts charged an appropriate amount of interest, and they repaid the loans according to their terms, and you reported the interest income received in your return. In short, it's best that you have treated the transactions like real loans in all respects. If you don't have that then it becomes harder to make the case for a loan. But certainly pointing to the fact that the amounts were not reported on any federal gift tax return (as they must if your total gifts to any one person during the year exceeds the gift tax exclusion amount for the year, currently $15,000) and that you reported the appropriate amount of imputed interest on your returns as described above, plus whatever other evidence you have (including but not limited to, the testimony of you, your wife, and your son) that these were loans. Whether that would be enough is something to ask a local attorney,


Could someone tell me the minimum interest rates for the years 2015 to 2020 my son must pay?
The applicable federal rates (AFR) are published monthly in the Internal Revenue Bulletin (IRB). You would look at the AFR in effect at the time the loan was made, i.e. the month you made the loan. You will generally use the AFR rates, not the higher 110%, 120%, etc rates. But which particular AFR rate you need depends on the details of the loans. I suggest you see a tax professional familiar with below market loans for help with this.

I never reported this loan to IRS or in my tax returns. If my son pays back the loan now (along with that required minimum interest), and I report that interest in my 2020 tax returns, is it enough to prove (for IRS tax purposes and any other legal purposes) that it was a loan (not a gift) paid back?
Reporting the interest on your return appropriately is likely enough for the IRS. Whether that will be enough for a court, though, is another matter as I discussed before.

In 2015, 2016, 2017, 2018 and 2019, my wife gave some loan and some gift to our son, from her personal account. If she wishes to forgive those loans (never collects that loan back) , will it be counted as if I am also involved in that forgiving (I cannot forgive any loan due to some legal issues I am facing from someone else).
Probably not, but without the details of this, including what those other legal issues are, I cannot say for sure.
 
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truthman

Member
Thank you very much for your input!!

I have some subsequent questions as my knowledge in these matters is very very low and I apologize for the same. I request you to kindly provide your response to the questions below. I will follow your valuable suggestion and will contact a local attorney on fraudulent transfer matters.

Let me correct: I have given little bit more than $20,000 to my wife each year (earlier, I just rounded and said it is $20,000) and the total loan to my wife is little more than $100,000. Additional information: I and my wife have been filing joint tax returns since we married. My son is included as dependent in our joint tax returns until the tax returns for the year 2017. After that he is not, because he is above 24 years or so.

(1). Do I need to collect any interest from my wife for the loans I have given her in all these years? Or if I simply collect back that $100,000+, will it be enough for IRS tax purposes? I saw that a husband and wife shall be treated as 1 person (under (f)(7)). Whether the loan between me and my wife is ignored, under IRC 7872, i.e., for imputed interest purpose?

(2). Do I need to mention anything about the loans I have given to my wife (between 2015-2019), in my 2020 tax returns or anywhere else, to the government (if she fully paid back this 100,000+ loan to me in 2020)?

(3). Is there any difference on collecting the loan amount (or interest) back from my son for the loans given to him during the years 2015-2017 (the years in which he is listed as depended in our joint tax returns) from collecting the loan amount (or interest) for the years 2018 and 2019 (during which he is not listed as dependent in joint tax returns).

(4). For my son, you mentioned “You don't have to collect the interest, at least for tax purposes. But you may have imputed interest to include on your tax return.” Thanks for that. However, I have no problem collecting the interest from my son for all these loans, and he is happy to pay it, and I will pay tax on that loan to make this loan matter clear. But I have a question on imputed interest. Let us assume that my son took $14,000 in April of 2018 and for which the imputed interest rates are here in this document: https://www.irs.gov/pub/irs-drop/rr-18-09.pdf . Based on this document, how much (imputed) interest rate he has to pay to me if he pays annually? 3.04, 3.35, 3.65, or 3.97% ?(or something else)? It is not clear to me from that document.

(5). If, for example (let us assume), the (imputed annual) interest rate (for April 2018) is 3.04% then does he/we need to calculate 3.04% interest on $14,000 starting from April 2018 until December 31, 2018 then add that interest to $14,000 then that total amount (let us say $14,100+) will be used as the principal starting from January 1, 2019 (i.e., for the year 2019) and the same 3.04 interest will be applied for the whole year 2019 on that $14,100+, then add that interest to that $14,000+ at the end of 2019 then use that as the principal for 2020, and so on until he pays back to me now in 2020. Is this the correct method of doing?

(6). You said “Reporting the interest on your return appropriately is likely enough for the IRS. Whether that will be enough for a court, though, is another matter as I discussed before.” If my son really pays the interest as explained above then will this make me much stronger, not necessarily in terms of clearing IRS taxes but, mainly, in terms of I facing possible fraudulent transfer matters?

(7). You said “Probably not, but without the details of this, including what those other legal issues are, I cannot say for sure.” The other legal issues means the possible fraudulent transfer claims explained earlier (this is the only legal issue).
 
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truthman

Member
Thank you. Yes, it was earned during the marriage. In fact, this is the only income I earned in my life.
 
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