All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 2
Registered: ‎11-27-2017
Accepted Solution

Gifting interest on loan to child

Hi Community,

I have loaned my child money for  education.
The loan document says that I am charging  5% interest.
I will be thrilled if I get paid back.
When I get paid back on time, I want to gift  the interest: not charge interest.
(That way I can use the interest as a penalty if I do not get paid back in a timely manner.)
 
Here are my questions:

If I do not receive interest from the borrower, I will not have to pay taxes. All money from borrower is return of principal. Is that correct?

If I give her a gift of the interest, and the interest is under $14,000 per year, she does not have to pay taxes on the gift. Is that correct?

Also, as long as the gift given and received is under $14,000, there is nothing about it that we need to put on our federal tax returns, correct?

I plan on keeping a careful accounts of the principal paid back and whether the interest was not charged.
 
Thanks,

Dadbank

 
Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Gifting interest on loan to child

HI dadbank,

 

 

Welcome to the H&R Block community.

 

Gifts will not affect you in this situation.  If you don't want to charge the interest then don't charge it.  If you end up not charging the interest then you simply don't have any interest income to report.  What the loan document says is irrelevant, it's whether or not you actually realize the income that matters.  So long as you have a record of the amount repaid each year and how much of it was principal and how much was interest that is sufficient proof of how much interest income, if any, you have to report.

 

The good news when it comes to gifts is that they are not ever taxable to the recipient, and that you would have to have a pretty large estate to actually have to pay the estate/gift tax later on.  You do, however, have to file a gift tax return if you give total gifts in excess of $14,000 to the same person in the same year.

 

So the easy way to deal with this is simply to not charge any interest when you're paid on time.  Apply the entire payment to principal and show that on your records.  You won't have to report anything on your tax return as far as interest is concerned, and you won't have to worry about keeping track of gifts.

 

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Pioneer
Posts: 2
Registered: ‎11-27-2017

Re: Gifting interest on loan to child

Thanks for your knowledgeable response!

Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Gifting interest on loan to child

You're quite welcome.