Gift Loans: What They Are and How They Work

Credit cards for gifts can be described as low-cost or no-interest-rate loans that are given to family or friends members. The most popular gifts are those made between parents and their children. In the past, they were frequently employed as a tax-saving strategy to cut taxes. For instance, wealthy parents used these agreements to transfer earnings to their children, typically those who were at lower income tax rates. However new IRS rulings have restricted the possibility of shifting income this way.

Types of Gift Loans

Gift loans such as GreenDayOnline, typically are classified into two types. There are two types of demand-based loans. The name implies that these loans can be paid at any point. In essence, the demand loan is due and payable at any time the borrower needs to pay. So, a demand loan is not a prearranged repayment schedule.

In contrast, the different kind of gift loan comes with specific repayment dates that are based on a specific time. It is also known as term loans. The term loan will be due according to the conditions of the agreed agreement.

How They Work

As such gifts are not low-interest loans. This means that the loan isn’t considered to be a gift. However, in the instance of loans with no interest rate, the interest rate is considered to be a gift. In the case of loans with low interest, the difference between the current market rate and the amount that you actually pay to the lending institution is considered to be a gift. As we mentioned before, recent tax laws have restricted certain tax benefits for lenders. This was achieved through the concept of imputed income as well as dollar limits.

Tax Implications

Imputed income implies an amount that is deemed to be a “gift” in these types of loan arrangements and could be tax-deductible at the close of the year in certain situations. While the lender may not receive any interest but the amount it could have received would be “imputed” or deemed received. To be tax-efficient the borrower will also be considered to be liable for paying the amount of interest. Thus, the lender might be required to disclose the imputed income for tax reasons. If permitted the borrower can be eligible to receive a tax deduction for the income that was imputed.

Gift loans of less than $10,000 are not subject to imputed income so long as the funds are not employed for investment purposes. If gift loans are used for investment reasons the amount of the investment income that the borrower receives will be used to determine whether there is any imputed income. If the borrower is earning an investment income of less than $1,000 income, and the loan amount is not more than $100,000, then there are no imputed earnings. If the borrower is earning more than $1000 in the form of investment earnings, they have imputed income. However, any imputed income will be restricted by the sum of the borrower’s income from investments. For instance, Smith makes Jones a $100,000 loan that is interest-free. Jones invests the money and receives $1500 in investment income. The imputed earnings in that of $1,500. If Jones had $1,000 of investment income, the imputed earnings would be zero.

Rufus T. Sifford