Is loaning interest-free money to relatives illegal?
 

I had lunch with a friend today and she was telling me that she and her husband inherited a large sum of money a few years ago. Because of the tax implications after the "one-time gifting", she and her husband decided they would "loan" money to their children throughout the year, of course never expecting repayment.

Last year they got audited and the auditor was inquiring about large sums of money being dispersed to the kids. My friend told them they were loans and the kids paid back what they could when they could. The auditor asked for records, written loan agreements, etc., which my friend could not produce. She was asked about interest and my friend responded "they're our children, we don't make them pay interest."

Long story short, the auditor said this was illegal. I call BS but then again, I don't work for the IRS.

Anyone have any idea about this? TIA!

Your assumption is wrong.

"Avoid Interest-Free Loans

If you insist on making a totally interest-free loan to a family member, the dreaded below-market interest rules may apply. If they do, you must follow complicated rules to calculate imaginary interest payments from the borrower to you. Then you get to pay real, live income taxes on the imaginary interest. The imaginary interest payments can also trigger imaginary gifts from you to the borrower, which may eat into your valuable federal gift and estate tax exemption. Crazy? Yes. But I didn't make these rules.

For loans under $100,000, there are some exceptions to the below-market loan rules. But the preferable approach is to avoid them entirely by charging an interest rate equal to the AFR. Plus I think it's best to charge some interest on family loans, just to keep the arrangement on a business-like footing. Believe me when I say that keeping things business-like can save a lot of unnecessary grief."

From here:
http://www.smartmoney.com/taxes/i...tromessage

1) How much were the sums of money?
2) When was this?
3) There are gift exemptions it was $5M per person last year. They could have simply gifted them the money tax free.

Doh! No, it is $13k.

There was no estate tax for inherited estates valued under $5 million prior to 2013 (now it's under $1M). You may gift up to $13k / year to someone tax-free. A married couple can each gift $13k, with some added effort.

0% interest loans are definitely illegal. Even to family members.

No that is the normal gift exemption. There was a $5M life time exemption for 2011 - 2012, which included both Gifts and Estate Taxes.

http://www.forbes.com/sites/rober...e-in-2013/

The $5M also applied to gifts.

This is from my sister, a tax CPA.

*****************
Technically that is correct. How it works is you can make a gift up to $13,000 per year/per person (but not over) and you’re done – it’s tax free to you, etc. If you make a gift over $13,000, say $14,000, you must file a gift tax return Form 709 and the amount over the $13,000 goes against your lifetime maximum tax-free exemption of $5,000,000. So, you can make a gift of $5,000,000 to someone today and it will be tax free to both of you; however, then you’ve completely used up your lifetime maximum estate exemption and when you die your entire estate will be taxable – you will no longer be able to exempt the $5,000,000 from the estate.

And, you will have to pay the tax, not the donee. You are responsible for gift tax (or use of exemption) when you give a gift of over $13,000 per year/person. Who you would give it to would benefit from the $5M, but it would be your estate’s loss after you die (and/or anyone else you chose to give a gift to in your lifetime).

Correct. You could have just asked me.

Thank you for this info. I had no idea that loaning interest-free money was illegal. I have no idea how much they lent their kids but if the IRS took notice, I'm guessing it was a pretty large amount.

I called her tonight and told her what I read here. I could hear her husband in the background, "Fine! F*ck the government! Starting next month we're giving the kids really expensive TV's and watches and sh*t, with gift receipts. They can return everything and keep the f*cking money."

:lol:

They are the kind of people that are determined to die broke so the government gets nothing. Can't say I blame them. That's certainly our plan. :P

A gift is a gift however. I don't think giving expensive gifts is a loophole to tax evasion.

it isn't illegal but there are tax implications.

i see stuff like this at work where people do stuff to reduce their net worth to qualify for federal benefits. i see it more with annuities and trusts.

http://www.buschfirm.com/publicat...y-members/

How does the government know you give people money anyway?? Do rich people really keep track of all their money??? If you give them cash, who is to know??? If they buy a car in there name, but the parents make the payments, who is ever going to know?

You don't become rich by not knowing where your money is. How did they access the cash? Form 709 is the form used for reporting transfers. I suppose you could not file it and run the risk of the IRS catching it in an audit (by the way you are more likely to get audited the hire your income goes).

So one can't give that money to their own parents or sibling, aren't we paying taxes already?? there are countries with far lenient rules.

Welcome to freedom.....LoL

OP was most likely doing other shady shit to get audited. Then during the audit the "loans" were uncovered. Government has no way to track cash gifts. $10k+ checks will most likely get tracked.

Hint: Don't do shit to get audited and you can hand money out.

Think about that for a minute...


You can get a lawyer and CPA to hide your money much better.

Seriously, if you are talking about a considerable amount of money, you should find someone you trust, like an accountant, who knows the laws.

Right now (from my basic understanding) the dad can give everyone up to 13K (his kids and grandkids), then mom can also gift 13K (kids and grandkids). That's 26K a year per person. However the one getting the money could have some tax issues with a larger sum.

What about a trust or college fund? You could get life insurance (it's not taxable when you die). There are some great financial vehicles out there but they (the gov't) keep screwing with the taxes and the laws so I would recommend an accountant or financial adviser.

Not that I can afford it, but if I gave my retired dad a car would that put me or him in trouble?

Was it a $100K+ vehicle?

IRS doesn't have the time nor resources to come after you--ever. The OP has extravagant gifts to multiple people + something else. That something else triggered the audit. Normal W2 with a normal return you have nothing to worry about.

Should of checked with a cpa first. You learn about 'loopholes' like this in beginning tax.

We sold my husband's car to a family member for $1. Told we shouldn't gift a vehicle but "sell" it.

It's the same as giving below market loans.

Sold car for $1. Had book value of $10K. $3k under limit.
Sold car for $1. Had book value of $50K. $36,999 is taxable.

Again, the IRS doesn't have the time nor resources to come after you for the low amount. Other things will trigger the audit first.

what exactly determines "book value"?

Quick way is to use Kelly blue book, edmunds, prices on craigslist, etc for the exact same car with exact milage. You have a lot of leeway to adjust it but attempting to bring down a $100K BMW isn't going to happen.

We're probably okay. It was older but still in good shape. But I would prefer giving it as a gift and taking care of things but it was the lady at the title office that recommended we "sell" instead of gifting. Maybe less paperwork for her?

The reason that so many people have problems with tax stuff is because the IRS doesn't care about what you call something. They have complicated and well defined rules for everything, including what is "income" and what is a "gift". Lets be honest here, you're trying to give money to someone with no tax consequences. This is well known, and the IRS defines things so this DOES have tax implications. The only thing you can really do is change who gets taxed.

I think it's such BS that you're taxed when you earn it, taxed when you spend it, taxed when you save it, taxed when you give it away and then taxed when you die.

I was gifted a $50,000+ BMW. That being said, it was to bribe me to not buy a Mustang.... I wonder if my uncle had to pay taxes on that.... :vomit:

fark the IRS. :vomit:

Get rid of it and everyone will be paid in "gifts" i.e. no taxes would be paid.

But this isn't true. YOU aren't taxed for all those events. When you give away money or leave it as an inheritance, the people receiving it are taxed. And I don't know what you mean by you're taxed when you save it. There are tons of tax programs that encourage saving (retirement plans etc.). And you're not taxed whenever you spend it, only when you spend it on certain items (groceries aren't taxed for example). So I think you're just upset over the whole concept of taxation in general....

I'll come back to everything else but right now I just want to talk about your comment "groceries aren't taxed". Uhhhh, I don't know where YOU live but here in MS we pay 7% tax on everything, groceries and meds included. My sister and my son live in AL and both pay 9.5% on groceries.

http://en.wikipedia.org/wiki/Sale...able_items

The majority of states don't tax groceries.

And you pay 1% less in state income tax than them. Taxes are just hidden elsewhere so. "TAX FREE GROCERIES1!1!" = higher taxes elsewhere. No state income tax usually means higher property taxes. Also the taxes collected reflect the supply available.

The OP is about federal taxes. Quit confusing city, county, and state taxes with federal because those taxes actually provide your day to day services and are useful.

Then NONE should be allowed to charge it.

I live in the city limits, less than one mile from the county line. If I lived in the county, my property taxes, car tags, school taxes and all other taxes would be HALF of what I pay now. People in the county utilize the same services that we in the city do but pay half as much.

But I digress.

Yes, the OP is about being taxed on money you "gift". I pay taxes when I earn it. I pay taxes when I spend it. I pay taxes when I save/invest it and my estate is taxed when I die.

It's just wrong.

Wahhhhhh, wahhhhhhhh, cry some more. Dear lord people, enough crying about taxes, your tax burden today is the lowest it has been in modern American history. Add on top of that the lowest interest rates ever, and you have tons more spending power than your grandparents did.

I guess you are totally ignorant about why different means of taxing exist, and thus why the government taxes 'everything.'

If I only tax income, then people living off of trust funds in mansions would pay no taxes, nor would retirees who's SS or pension may be peanuts. Thus I have to charge high income taxes, which punishes workers.

If I only tax purchases, yet again, I have to charge high taxes on purchases which disproportionally affect the poor or those with a limited income like retirees. If decide not to tax the necessities (food/fuel/utilities) then I reallllly have to tax like crazy on technology, luxuries, housewares, etc. You think Sony/Samsung/Apple are going to like that?

If I only tax properties, I have to charge ridiculous property taxes to make up for lost income/purchase taxes. Guess what, fixed income retirees get screwed (see Florida) and so do property investors/managers.

This is why a balanced approach is the best. You wanna see stupid? Look at what that dumbass Florida governor has done. He wants to eliminate corporate taxes to bring in business, but FL has no income taxes. Thus all those new workers wont be contributing to the tax income via working. Meaning they will rely solely on property and sales taxes. Guess what, people will live across the border or buy things across the border to get around that. Except those who live too far away, in which case retirees will flee the state.

Balanced is best, so be thankful that the government taxes 'everything' to spread the cost around, and also be thankful the rates at which they tax are ridiculously low.

:huh:

:lmao::lmao::lmao:

Where the fark do YOU live????

100% true and chances are you are not paying taxes on groceries when you are shopping and you don't even realize it.

Go buy a steak from publix. It will scan for the amount on the label and you will only pay for the amount on the label.
Try it with a can of corn. Same result.

I worked at a grocery store in highschool. I've manually entered in barcodes into the system on new products that arrived and there was simple check box for if the item had sales tax.

You are charged tax on processed items like ready to eat pies, already made sandwiches from the deli, hot items prepared on site.

If you go to a grocery store and pay tax on a steak or a can of corn you should let a manager know that a barcode is wrong in the system.


For more examples: http://www.tax.ny.gov/pubs_and_bu...stores.htm

I think you seem to be exaggerating to prove your point. Notice the city roads paved better? More firehouses, schools, internet service, bus service, hospitals, etc, etc... There should be, and most likely is, a huge drop off in services right at the city limits. If your city is subsidizing the county, then blame yourself for voting for the people running your town.

You can easily solve your tax problems by moving or go buy a boat and live in international waters. But then I think you would just complain about the lack of services.

Taxes pay for services.

*sigh*

No. We pay 7% on ALL foods, doesn't matter the type. When I lived in FL we paid NO taxes on food. None! Now they pay tax on "junk" food and soda.

No.

FL is taxed across the board on food. That isn't some "recent thing."

Stupid people elect stupid people who vote stupidly. Look in the mirror or move if you don't like it.


Your son goes to college:
http://slickdeals.net/forums/show...stcount=25

Are you aware that 25-50% of in-state tuition is subsided by the taxes you don't want to pay anymore? Goes to school out of state? Someone else is paying that. People who live near you temporarily or move for a new job subsidize that same tuition. Why should other people pay for your son's education?

There are certain exceptions for direct payment of education funds and probably a few other things--so you can pay your child's college tuition without triggering the gift tax. Also, there's another special case with the college 529 plan; you can accelerate gifts for up to 5 years, but you still have to file the 709. So, for example, if you were married in 2012, you could gift $130,000 (5 years, 2 people, $13K per year) to each donee without using the exemption or triggering the gift tax. Michelle and Barack Obama did this, if you take a look at their old tax returns. Of course, you've exhausted your gifts for the next five years up front, but it's still a more efficient way to give money away.

Do you try to be wrong in everything you say or are you just naturally stupid??? :huh:

I'm done here.

False. Only on selected foods (like candy, soda etc). Bakery items aren't taxed

They also pay for plenty of fat, depending on the state you live in.

would it still be illegal if the market interest on such a loan was below 13k a year? (that's a LOT of interest), such that they are only gifting the interest amount each year?

Terrible Idea..Either give them free money with no strings attatched or avoid lending money to family.

:secret: that's true in ny but not everywhere, as already mentioned by MsGal

http://en.wikipedia.org/wiki/Sale...risdiction

You are arguing over semantics. Inheritance = Estate Tax = "Death Tax"

AND after 30 years Gynecologist/ Congressman Ron Paul is ONLY worth 2 - 5million?



05/14/2012
http://clerk.house.gov/public_dis...205628.pdf



Did he GIFT AWAY? LOL...