how do I report imputed interest on a below-market-rate loan that I made to my son?

[SabrinaD2 · Accepted solution]

To report imputed interest on a below-market-rate loan to your son, follow these steps:

• Determine AFR: Find the Applicable Federal Rate (AFR) for the loan term on the IRS website. The AFR is the minimum interest rate set by the IRS that you should charge on the loan.
• Calculate Imputed Interest: Imputed interest is the difference between the interest you actually charged and the interest you would have charged at the AFR. For example, if you loaned $10,000 at 1% interest for one year, but the AFR is 3%, the imputed interest would be $200 ($10,000 x (3% - 1%))
• Report as Income: Include the imputed interest as income on Schedule B of Form 1040.  Follow steps found here - these work with or without a 1099Int.
• Gift Tax Considerations for the forgone interest: The IRS allows an annual gift exclusion amount, which is $18,000 per recipient for 2024 . If the imputed interest exceeds this amount, you may need to file a gift tax return (Form 709). More details can be found on the IRS Gift Tax page.