Families take care of each other, at least most do. Sometimes, this requires offering financial assistance. Lending money to family is not without its consequences. There are even tax consequences of which some Connecticut residents may not be aware.
Sometimes, family loans are pretty informal. Repayment is expected eventually, but there is no set timeline, and there is no formal agreement on interest. The problem with this is, the Internal Revenue Service has a set interest rate for family loans, and that interest, which should be repaid with the loan amount, should be counted as income for the lender. Even if interest is not collected, the lender is supposed to report this income to the IRS. The IRS does not care too much about loans that are $10,000 or less, but the imputed interest rules do apply to loans of higher value.
There are those individuals who are willing to gift money to other family members. There is a gift tax exclusion that may be applied, as long as the amount given is no more than $15,000, or $30,000 if a married couple is providing the funds. So, there may be no tax consequences for the lender or the borrower.
If loan interest income is not reported, the lender may find him or herself being questioned by the IRS. If a gift was given that is above the current gift tax exclusion and taxes were not paid on this, the giver and receiver may both face questions from the IRS. Family loans and monetary gifts may not seem like a big deal, but they are, and failure to report them properly can result in one having to pay hefty fines, among other penalties. Connecticut residents who have found themselves being investigated due to the improper reporting of loans or gifts can turn to legal counsel who will be able to walk them through the audit process. With the right assistance, one can do everything possible to minimize any tax consequences that may come.