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Family, Finances, and the IRS: What You Need to Know About Loans

 

One of the top questions I receive from clients is, “Are there any tax implications if I give my child $XX?” The short answer is… it depends. Before deciding to offer anyone a significant sum, there are financial factors to consider: How much? What’s it for? Is there an interest rate? To name a few. Wildalea is here to break down all considerations before you issue a family loan.

 

The $10,000 Rule

To be blunt, the IRS is far more interested in taxpayers falsifying documents or avoiding tax payments than you giving your son or daughter a $5,000 graduation gift or offering your sister $3,000 to help her move. The golden rule is that in most family loan scenarios under $10,000, the IRS usually does not get involved – however, there are exceptions to every rule, such as family loans under this amount can not be used for investments, including stocks and bonds. Anything $10,000 or more will likely sound off alarm bells to the IRS and have them interested in the who, when, why, and how.

 

Gifts vs. Loans

Before giving a family member any type of financial amount, it’s important to understand the tax differences between gifts and loans. In simple terms, a loan is the money transferred with the expectation of repayment and a gift eliminates that expectation. Loans create taxable interest income for the lender whereas gifts do not. Now, the important consequence to understand is that if a loan isn’t documented or repaid, the IRS can reclassify it as a gift which has different (and sometimes negative) financial repercussions. 

 

The Greatest Gift: Interest Rates & Contracts

It is in your best interest (see what I did there?) to charge interest with any family loan as well as document the terms properly. Imposing an interest fee and drawing up a contract proves to the IRS that it is a loan, rather than a gift. Student tuition is a common example I see where parents enact a repayment contract for their child (which teaches them other skills too!). Of note, paying your child’s tuition directly to the school is neither a gift nor a loan if you expect no repayment no matter what the dollar amount. It only becomes a loan if you want your child to repay you. It’s essential to understand that interest income is taxable income, and you’ll need to pay income tax on interest payments and report them to the IRS. The minimum interest rate that this can be is defined quarterly by the IRS and is called the Applicable Federal Rate (AFR).  

 

It’s also worth noting that there is a “gift-giving limit,” or annual gift tax exclusion. This is the maximum amount of cash gifts that you can give without having to file a gift tax return. As of 2025, this number is $19,000 which means any sum over this amount requires filing a gift tax form. If you don’t charge interest, the IRS may treat the unpaid interest as a gift under current tax rules.

 

FAQs

What if the IRS thinks my undocumented loan is a gift? If you decide to forgo the proper documentation and the IRS decides to classify your loan as a gift, you may be at risk of needing to file a gift tax return.

What if my family member or child doesn’t pay me back? If your family member does not pay you back, you can always take a bad debt deduction. This means that you must prove that the debt is truly worthless and there is no chance of repayment.

 

Loans are a safe and generous way to offer funds to family members, but it’s important to know the contributing factors of a tax loan and recognize the consequences if not filed properly. From gift tax forms and financial loan advice to a tax strategy that benefits the whole family, Wildalea has your back. Wildalea is a full-service provider of tax strategy and strategic tax preparation to make sure that you are only paying your fair share of taxes. It’s our goal to remove surprises, communicate effectively and minimize your tax bill within the clear lines of the tax code. Keeping you educated, informed and compliant. 

Relevant Sources:

https://blog.taxact.com/family-loans-lend-my-kids-money, https://www.irs.gov/pub/irs-pdf/p550.pdf