topic Personal loan in After you file

Personal loan

bandit77 — Wed, 18 Dec 2024 20:00:18 GMT

I set up a personal loan to my son ($75,000) (documented with loan agreement).

what information needs to be filed with IRS so that they do not try to claim that it is a gift exceeding the allowable gift exemption? can this be done in Turbo Tax?

Re: Personal loan

Mike9241 — Wed, 18 Dec 2024 20:15:05 GMT

There is nothing to report in Turbotax or to the IRS. The best way to protect yourself from the IRS claiming it was a gift is to prepare a formal note with repayment terms and at least market rate interest.

Failure to charge interest allows the IRS to use code section 7872 to impute interest and then hit you with taxes, penalties and interest for failure to report.

U.S. Code § 7872 - Treatment of loans with below-market interest rates

https://www.law.cornell.edu/uscode/text/26/7872

Re: Personal loan

Opus 17 — Wed, 18 Dec 2024 21:18:44 GMT

There is nothing specifically to report to distinguish the loan from a gift.

However, if it is really a loan, you must charge interest, and report the interest as taxable income on your return. If you do not charge interest, you must still report as income on your return, the interest you could have charged, using the minimum applicable federal interest rate. (AFR). This is called imputed interest. The current AFR is here

https://www.irs.gov/applicable-federal-rates

I believe that technically, what is assumed to be happening is that you charge interest, report it as income, and then pay it back to the borrower as a new gift. For example, the AFR for December using monthly compounding is 4.21%, that would be $258. You report $258 as taxable income, then you gift the $258 back to your son. Since the give-back of the interest ($3096 per year, or less if he makes payments) is less than the $18,000 threshold, it does not need to be reported.