Tax Implications of Forgiving a Loan
A gift loan can be put in place to pay off the balance of an outstanding loan. For instance, a parent may decide to give a child $10,000 to get rid of a student loan as this would make it easier to save for other goals. The child may be expected to repay the principal at a time in the distant future, but no interest would be charged. This undoubtedly saves the child a bundle in interest, but what about the tax implications of the transaction?
If the loan is considered to be a gift there are no tax consequences for either party as long as the gift falls within the parameters set by the IRS. To qualify for this tax exemption the gift loan must be less than $100,000 and the interest income should be less than $1000. However, if the terms of the loan generates interest income that is greater than this amount or the principal of the loan exceeds this balance the gift loan must be reported on the tax return on the lender.
If a parent lends a child $150,000, the parent must state a figure that represents the interest income on their tax return. This is true even if no interest is actually collected, because the parent may be called upon to impute an interest charge and pay taxes on that amount.
While it might be within your means to offer assistance it makes sense to find out what the consequences are likely to be so there are no unpleasant surprises at tax time and you are clear on how to gift loan balances.
Tax Implications When Parents Gift a Loan Balance
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