Question

On January 1, Year 1, Marge made a $60,000 interest-free loan to her son, Steve, who used the money to start a new business. Steve’s only sources of income were $50,000 ordinary income from the business and $1,200 of net investment income from a corporate dividend. The relevant federal interest rate was 5%.

(a) What is taxable interest (if any) of this interest-free loan?

(b) What is the net effect of the taxable interest (if any) of the interest-free loan on the Year 1 taxable income of Marge.

(c) What is the net effect of the taxable interest (if any) of the interest-free loan on the Year 1s taxable income of Steve

Answer 1

a. The taxable interest is $50000 as the interest free loan exceeds $10000 so from $60000 , $10000 will be exempt and the taxable interest will be charged on remaining $50000 as (60000 - 10000).

b. The Net effect of the taxable interest will be $10000 will be considered as a gift to family members if the amount of interest free loan does not exceeds $10000 then it is not taxable . But in this case Merge will charged a taxable interest at lower rate of a federal rate 5% on $50000 .

c. Steve will not charged as he is a loan borrower and he has taken a loan below $100000 but he will charged on $1200 of net investment income from a corporate divident .If steve would earned $1000 which is exempted . But in this case he earns more then $1000 so he will charged as a taxable interest on $1200.