I loaned money to a family member about 10 year ago (I wrote "loan" on medical bill checks that I wrote). They are finally getting their finance in order and thinking about paying me back soon. I've heard that if I don't collect interest then the IRS will consider it a taxable gift instead of a repayment of the loan. So how low of an interest rate can I charge for it to be considered a loan? 0.001% ? I was going to collect a back interest payment this year for years past. Then next year or the year after they would pay me back in full.
@Face_in_the_crowd wrote:
So how low of an interest rate can I charge for it to be considered a loan? 0.001% ?
You have to use to AFR (applicable federal rate), for the period of the loan, which the IRS publishes.
See https://apps.irs.gov/app/picklist/list/federalRates.html
You might want to read through the following TurboTax article.
https://turbotax.intuit.com/tax-tips/tax-payments/irs-tax-rules-for-imputed-interest/L7UbulHpC
Also, note that if you were paying a provider of medical services directly, that would not be considered a taxable gift.
The total amount of my loans was less than $8,000, some for medical insurance premiums, ambulance charges, and for a care taker. I wrote these checks out to the insurance company, to the ambulance company and to the care taker -- not to this family member. These payments from 2011 to 2013.
So what you're saying is that if I am repaid then there are not taxes for me to pay?
@Face_in_the_crowd wrote:So what you're saying is that if I am repaid then there are not taxes for me to pay?
No, you would never pay income tax on the repayment of the principal balance of the loan. Only the interest (or imputed interest) would be taxable.