Quoting:
If a family member provides a below-market loan (one with an interest rate below the prescribed market rate), the forgone interest (the difference between the market rate and the actual rate) is treated as follows:
The lender is considered to have transferred (gifted) the forgone interest to the borrower (may require filing gift tax return if the interest is high enough).
The borrower is then deemed to have retransferred the same amount back to the lender as interest.
What this means in (hopefully) simpler language, is that if you do not charge interest, you must still report taxable income equal to the interest you would have received if you had charged a market rate. The applicable federal rates are here.
https://www.irs.gov/applicable-federal-rates
For a short term loan made in May 2024, the minimum interest rate (when interest is calculated monthly) is 4.86%.
That means that if you loan your mother in law $10,000, you must report $10,000 x 4.86% ÷ 12 = $40 per month of interest income, regardless of whether they actually pay interest. If you charged them $10 per month interest, you must still report $40 (the 4.86% rate). If you charged them more than 4.86%, you would report the interest that you actually received.
Likewise if you loan your father in law $10,000, the same calculation applies. It also doesn't matter if you loan $10,000 each or $20,000 to one of them, the calculation is the same.
You can report this as interest income on your 2024 tax return at the end of the year, even though your relatives do not give you a 1099-INT form.
The gift portion of the rule is that if you make the loan interest-free, you are treating as gifting them $40 per month each, or $80 per month total. That is not large enough to require reporting on a gift tax return, so for practical purposes, you can ignore that side of the situation.
