Question

Tom loans $11,000 to his daughter tina. why would interest not be imputed on this loan

Answer 1

Interest may not be imputed on a loan from Tom to his daughter Tina because the loan amount or imputed interest may fall under the IRS gift tax exclusion limit, or the interest could be forgiven as part of this exclusion. Special IRS rules for family loans might also apply, negating the need for imputed interest.

Step-by-step explanation:

Interest might not be imputed on a loan between family members like the one from Tom to his daughter Tina for several reasons. One of the most common reasons is that the Internal Revenue Service (IRS) has a gift tax exclusion amount, which allows individuals to give a certain amount per year to another person without any tax implications. As of 2023, the annual exclusion is $16,000 per recipient. If the loan is less than this amount or if the interest that would have been charged is less than this amount, it may not need to be reported as income or have interest imputed.

Another reason could be if the lender decides to forgive the interest, treating it as a gift. This assumes that the total interest plus other gifts to that individual do not exceed the annual exclusion limit. Additionally, there are special rules that may apply for loans between family members, such as the interest rate being below a certain minimum set by the IRS, known as the Applicable Federal Rate (AFR). In these cases, and when the loan is for personal purposes rather than income-producing investments, the IRS may not require the lender to recognize imputed interest income.

Answer 2

Interest would not be imputed on this loan because the loan came from his Tom’s daughter. He would not be expecting to have interest for the amount he borrowed from his daughter because they have a father – daughter relationship. Interest would only be imputed if the amount borrowed by Tom would be used in his business which would be a separate juridical entity.