2020 Tax Planning Tips: Part 4

If you’re new to our 2020 Tax Planning series, click here to start with Part 1! Otherwise, keep reading for some more great tips to help individual taxpayers minimize their 2020 tax bill. In Part 4, we’re going over intrafamily loans! 

Be on the lookout for part five, where we’ll get into year-end planning moves for small businesses. 

Year-end Planning Moves for Individual Taxpayers

Tax Tip #6: Consider Intrafamily Loans

Interest rates are at a historic low and continue to decrease. This scenario creates an attractive opportunity for those interested in assisting family members financially and transferring assets in a tax-efficient manner.

Individuals who wish to lend money to relatives may do so at interest rates lower than what commercial lenders offer—allowing the lendee to save money on interest! 

There’s a minimum rate that can be charged by the lender called the Applicable Federal Rate (AFR). Loans with interest rates below the AFR may be subject to gift tax rules. While it’s generally advisable to stay above the AFR to avoid being caught by the gift tax rules, individuals can use the annual and lifetime gift exclusions to maximize the benefit to the lendee.

To ensure the loan is an arm’s length transaction, follow these steps: 

(1) Have a properly worded and signed document.

(2) File the documents with the necessary authorities.

(3) Provide the lendee with a formal document that summarizes the amount of interest paid each year.

(4) Either collect the loan payments or establish the payments will be gifted. 

Looking for More Guidance?

If you’re interested in taking advantage of intrafamily loans, or you have general tax planning questions, contact Dent Moses today. We’re all about providing you with high-quality financial management services and an exceptional level of compassion.