Monday, April 21, 2008

Lend Your Loved One Money, Then Pay Gift Tax?

When helping your kids or other loved ones with a loan, you can run afoul of the Federal Gift Tax.

One way to deal with that tax is by lending children money:
Lend and borrow money.

Credit between family members requires the formalities of a bank loan, but the rate can be more favorable.

If you lend money to family members — say, to buy a house or a car, start a business or pay off an unfavorable bank loan — you must charge a minimum rate of interest set each month by the Treasury, called the applicable federal rate. In April, the rate for long-term loans (those lasting more than nine years) and requiring monthly payments is an extremely attractive 4.31 percent.

Alternatively, you can benefit parents or siblings by borrowing money from them and paying more interest than they could get from money markets or bank C.D.'s. There's no maximum government-set rate, but Mr. Moore suggests you "mimic the market" by paying what a bank in your area would charge for a comparable personal loan.

See more about other frugal techniques for dealing with this issue:

When Generosity Bumps Into Gift Tax
April 21, 2008
THESE days, many prosperous baby boomers are subsidizing parents, and sometimes siblings, who are less fortunate. Innocuous as this may seem, being generous can also subject you to gift tax. While helping a family member often occurs under the radar, if the gift exceeds a certain value and the I.R.S. catches it, you could be forced to pay the tax as well as interest...

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