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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