IRS tax attorneys warn that good-deed and loaning and/or borrowing money to/from a relative may create unexpected tax consequences. That’s right, the next time Uncle Toothless hits you up for a loan to buy that set of new dentures, or your kid needs money for those method acting lessons from an Ashton Kutcher want-to-be, IRS tax attorneys suggest you pay closer attention to a frequently overlooked corollary to loaning/borrowing money – taxes.
Most IRS tax attorneys will tell you that it’s hard to say precisely how many Americans loan/borrow money to/from their families, particularly during these difficult economic times. However, a few of these IRS tax attorneys point to a recent Australian study which suggests the average Aussie loans/borrows approximately $2,400 per year to/from family members.
According to these same IRS tax attorneys, the Australian study claims the most common reasons for borrowing money are unforeseen “emergency situations” (49%) or “running out of money” before payday (26%). Further, the IRS tax attorneys who’ve reviewed this study’s findings say that when it comes to hitting-up family members for dough, women appear to be roughly twice as likely as men to ask a family member for a loan. According to these same IRS tax attorneys, young adults, ages 18 to 24 years-old are the group most likely to need to borrow money from family members; and city dwellers are more likely than suburban or rural residents to ask for a loan, according to the study.
In the United States some IRS tax attorneys think baby-boomers are the most likely family members to be hit-up for loans. These same IRS tax attorneys say that when it happens, most boomers are woefully ignorant of the tax effects of providing such financial support to their families. In fact, several of these IRS tax attorneys rely on a report from the National Family Mortgage (a Boston-based service provider for inter-family home loans) to support their assertion. National Family Mortgage (NFM) claims it has funded $42 million in mortgage loans between family members, and the number of loans is growing.
Also significant, IRS tax attorneys report that NFM conducted a survey, in collaboration with Harris Interactive, which tracked the tax implications of family loans. These IRS tax attorneys claim there are several other recent, highly publicized surveys which “have reported that U.S. baby boomers are providing significant financial support to both their adult children and aging parents.” In fact, several IRS tax attorneys claim the report appropriately asserts that “while financial experts have expressed concern over boomers sacrificing their own retirement in order to help relatives, unsuspecting boomers may also be inviting IRS tax troubles as a result of this goodwill.”
IRS tax attorneys observe that often family members make loans to other members of the family without charging interest (or will charge an interest rate which is well below-market). These same IRS tax attorneys say when this happens you can be walking a virtual tightrope of tax related issues. As such, these IRS tax attorneys recommend that you consider upfront planning before deciding to make the loan to a family member.
Specifically, IRS tax attorneys claim it is critical you engage in advanced tax planning to avoid unexpected tax consequences when making loans to relatives. These IRS tax attorneys also say a key factor in how you structure the loan is the amount of interest you charge. IRS tax attorneys maintain that loans between family members where the interest charged will be below-market rates (in other words, you charge your relative no interest or at a rate below the Applicable Federal Rate (AFR)).
For those of you who might be interested in checking the current AFR, IRS tax attorneys direct you to www.irs.gov where the IRS publishes AFRs monthly on its website. IRS tax attorneys invite you to type “AFR” into the search window, and then click on “Index of Applicable Federal Rates.” IRS tax attorneys point out the relevant AFR for a particular loan is the one in effect for loans of that duration for the month the loan is made or for any of the three preceding months.