How to determine gift amt for interest-free loan?


C

curiousgeorge408

I am making an interest-free loan to my daughter.
Technically, I believe the IRS requires that I consider
the some amount of interest at some rate as a gift.
Right?

How do I determine the appropriate interest rate to use?

Would I use an interest rate that is "typically" offered for a
loan in our area? Even so, what type of loan rate would I
choose?

Or would I use an interest rate that I would expect to
earn if I had left the money in, say, a regular savings
account or CD?

I know I do not need to worry about this unless the
interest per plus other gifts might exceed $24K per
year (MFJ).

But I am still interested in knowing the answer, for my
edification, as well as to ensure that I do not exceed
the $24K limit.
 
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J

JoeTaxpayer

I am making an interest-free loan to my daughter.
Technically, I believe the IRS requires that I consider
the some amount of interest at some rate as a gift.
Right?

How do I determine the appropriate interest rate to use?

Would I use an interest rate that is "typically" offered for a
loan in our area? Even so, what type of loan rate would I
choose?

Or would I use an interest rate that I would expect to
earn if I had left the money in, say, a regular savings
account or CD?

I know I do not need to worry about this unless the
interest per plus other gifts might exceed $24K per
year (MFJ).

But I am still interested in knowing the answer, for my
edification, as well as to ensure that I do not exceed
the $24K limit.
The chart is fresh (good thing) but the wording here is vague (bad);

http://www.irs.gov/irb/2009-02_IRB/ar08.html

The rates I'd suggest using are in the first chart, and are .81 for
short term, 2.06 mid-term, and 3.57 for a long term loan.
By the way, the gift limit has been increased to $13K/yr, so for you and
spouse, $26K is your limit. If your daughter is married, $52K to gift
from both of you to both of them. That turns into a pretty large amount
of money, even if it's just her.

(For anyone else attempting to answer this - I googled on this topic,
and searched through the IRS site. I found many references to
"Applicable Federal Rate (AFR) and searching on that led me to the IRS
link above.)

Joe
www.blog.joetaxpayer.com
 
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C

curiousgeorge408

By the way, the gift limit has been increased to $13K/yr
Thanks. I wasn't aware of that. I don't see that information
in the online IRS Pub 950, which is still the 2008 version.

The chart is fresh (good thing) but the wording here is vague (bad);
http://www.irs.gov/irb/2009-02_IRB/ar08.html

The rates I'd suggest using are in the first chart, and are .81 for
short term, 2.06 mid-term, and 3.57 for a long term loan.
Thanks for the pointer. I have some follow-up questions, if I may;
mostly just curiosity.


1. Is this (i.e. how to determine imputed interest rates for interest-
free
loans) discussed in any IRS Pub or other "normal" public document?

I'm just wondering how a "mere mortal" like myself is expected to
learn this information.


2. The AFR tables show essentially the same interest rate for annual,
monthly, et al for short-term loans. Are those all "annual
rates"?

For example, for short-term monthly compounding, the Dec 2008
rate is 1.36%. I assume that does not mean 1.36% per month
(17.60% APR). Right?

Even so, is the "monthly" rate of 1.36% a simply interest rate, or
is it an APR? That is, is the actual monthly rate 1.36%/12, or is
it
(1+1.36%)^(1/12)-1 (RATE(12,0,-1,1+1.36%) in Excel-speak)?


3. Finally, my __real__ question: what amount is actually considered
the gift amount?

Consider this example: a 25-month of $100,000, to be paid
back interest-free in equal payments of $4000 each. The loan
origination date is in Dec 2008.

According to http://www.pmstax.com/afr (see below), we should
use the short-term AFRs. The annual rate is 1.36%, if my
assumption in #2 above is correct.

(Note: The following figures assume 1.36% in the annual
interest rate, not the APR.

(Also, I assume that it is correct to use the AFR as of the loan
origination date as a fixed interest rate. Right?)

For the equivalent amortized loan with no balloon payment,
the monthly payment would be about $4036, and the interest
paid each year would be about $1064, $411, $5 (= $1480 total).

On the other hand, the difference in total payment each year
between the amortized loan and interest-free loan would be
$720, $720, and $40 (= $1480 total).

So in the 1st year, would the gift be $1064, or would it be $720?

(For anyone else attempting to answer this - I googled on this topic,
and searched through the IRS site. I found many references to
"Applicable Federal Rate (AFR) and searching on that led me to the IRS
link above.)
That's great, if you know what to look for in the first place. I
didn't. But
once you mentioned it, it occurred to me to google "imputed interest
rate"
(without quotes). One search result points to http://www.pmstax.com/afr,
which points to similar information.

Thanks again for the pointers and information.
 

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