Interest rates can affect your taxes
Tax Tip of the Week
August 12, 2013
Interest rates can affect your taxes
Do you keep up with fluctuations in interest rates? The IRS does too, and changes in those rates could affect your tax return. For instance, applicable federal rates, or AFRs, are published by the IRS to set a minimum interest rate for certain transactions, such as loans to family members.
How does that affect you? Loans you make that carry an interest rate lower than the market offers can be considered a taxable transfer for income and gift taxes. The result: You might have taxable income even if you receive no interest, and a gift tax return may be required. Not reporting the income or not filing a gift tax return when necessary, could lead to penalties.
Establishing a written loan agreement with a stated interest rate — for example, the AFR in effect for the month of the loan — helps avoid misunderstandings.
The IRS also publishes interest rates that apply to the underpayment and overpayment of your taxes.
Say you get a notice increasing the liability on your federal return. You'll generally owe interest from the due date of the return until you make payment. The interest is compounded daily, and applies to penalties as well as to the underpaid tax.
Interest rates can provide opportunities for planning, including strategies for making transfers of your business to family members and charitable trusts. Please call if you need additional information.
"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
© MC 2013
August 12, 2013
Interest rates can affect your taxes
Do you keep up with fluctuations in interest rates? The IRS does too, and changes in those rates could affect your tax return. For instance, applicable federal rates, or AFRs, are published by the IRS to set a minimum interest rate for certain transactions, such as loans to family members.
How does that affect you? Loans you make that carry an interest rate lower than the market offers can be considered a taxable transfer for income and gift taxes. The result: You might have taxable income even if you receive no interest, and a gift tax return may be required. Not reporting the income or not filing a gift tax return when necessary, could lead to penalties.
Establishing a written loan agreement with a stated interest rate — for example, the AFR in effect for the month of the loan — helps avoid misunderstandings.
The IRS also publishes interest rates that apply to the underpayment and overpayment of your taxes.
Say you get a notice increasing the liability on your federal return. You'll generally owe interest from the due date of the return until you make payment. The interest is compounded daily, and applies to penalties as well as to the underpaid tax.
Interest rates can provide opportunities for planning, including strategies for making transfers of your business to family members and charitable trusts. Please call if you need additional information.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
© MC 2013
