Question

5.   Taxpayer (“T”), a cash basis individual taxpayer, lent money to each of his two daughters (“D1” and “D2”) on January 1 of the current yer. T lent $50,000 to D1 and $110,000 to D2. T did not charge any interest on the loans. D1 was 19 years old and used the $50,000 to open a brokerage account which invested in stocks. D1 had $300 of net investment income during the year. D 2 was 26 years old and used the loan to renovate her personal house. D2 had no investment income during the year. The applicable federal rate “AFR” is a 5% annual rate. The loans were outstanding for the entire year. What amount of income, if any, will T include on T’s individual income tax return as a result of the loan to

Answer 1

There is no need to club below mention income

• lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds.
• lend a child $100,000 or less, and the child’s net investment income is not more than $1,000 for the year.

hence the income of D1 is not to be clubbed in T

If you loan a significant amount of money to your kids – say, enough to buy a house – it’s important to charge interest.

If you don’t, the IRS can say the interest you should have charged was a gift . In that case, the interest money goes toward your annual gift giving limit of $14,000 per individual. If you give more than $14,000 to one individual, you are required to file a gift tax form.

hence the amount of D2 is also not going to clubbed in the income of T