PAYING TAXES ON PERSONAL LOAN INTEREST THAT YOU RECEIVE
If you give someone a
personal loan
and are charging/collecting interest, the IRS will consider
this interest as investment income. Therefore, you are going
to be required to report this interest on your tax return
and pay the right amount of taxes on it. It is important to
note that even if you loan someone money and do not charge
them interest, the IRS still may consider you to be
receiving taxable income and will compute the interest
amount that they consider you owe for you. Get more advice
about
paying income taxes.
Loan Documentation
Any personal loan that you make to a
family
member or friend that you receive interest on has to be
reported on your tax return as income. It is important that
you authenticate the loan by drawing up an uncomplicated
loan agreement (otherwise known as a
promissory note) that details all the terms and
conditions of the loan. This should include that amount of
money you are loaning and what the interest rate that you
are going to be charging for the lending of this money. You
should also incorporate what the obligatory monthly payments
are going to be and what the total term of the loan is going
to be.
Reporting Interest on Schedule B
The IRS form where you can report all of your investment
or interest income is called a Schedule B. Individuals that
are paying interest to you will (should) send you a 1099-INT
form outlining precisely what you have paid. Any personal
loan that you have made, the payer will likely not be
sending you a 1099. Therefore it is important that you
report this on your tax return yourself. This interest
should be reported in part one of Schedule B on its on
separate line. Record the sum from the Schedule B on line 8a
of Form 1040, line 8a.
Reporting the Interest Without Schedule B
In the event that you obtained less than $1500 in
interest for the year, you will not be required to report
any interest on the Schedule B. But, a good idea would be to
detail all the interest you collected on a separate piece of
paper so that you can keep tally of the total interest
receive and also have the info for your records. Report the
sum of all your dividend and interest income on line 8a of
Form 1040.
Other Factors to Consider
Suppose you grant a loan to family member or friend and do
not charge them interest. These types of financing
preparation must be handled delicately since it is possible
that the IRS may compute an interest rate on that loan and
subsequently charge you taxes on that income (otherwise
known as imputed interest). There is also a 'gift tax'
charged by the IRS with larger loans that are not charging
any interest to the receiver. To avoid these taxes, it is
important that you document the loan payment and interest.
Understanding Personal Loan Interest Rates
Why Are Personal Loan Interest Rates Higher?
What Does APR Mean?
Factors That Determine Interest Rates
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