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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in tax
Dear Valued Client:
Hope you had a wonderful holiday season. Here?s the fiscal cliff
update & summary, which the President is expected to sign.
Tax rates beginning January 1, 2013
A
top rate of 39.6% (up from 35%) for individuals making more than $400,000 a
year, $425,000 for head of household, and $450,000 for married filing joint.
2% Social Security reduction gone
AMT permanently patched
A
permanent AMT patch, adjusted for inflation, will be made retroactive to 2012.
Dividends and capital gains
The
maximum capital gains tax will rise from 15% to 20% for individuals taxed at
the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on
filing status, as noted above).
Itemized deduction and personal exemption phase-outs
The
itemized deduction phase-out is reinstated, and personal exemption phase-out
will be reinstated, but with different adjusted gross income (AGI) starting
thresholds (adjusted for inflation): $300,000 for married filing joint,
$275,000 for head of household, and $250,000 for single.
Estate tax
The
estate tax regime will continue to provide an inflation-adjusted $5 million
exemption (effectively $10 million for married couples) but will be applied at
a higher 40% rate (up from 35% in 2012).
Personal tax credits
The
$1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the
enhanced American Opportunity Tax Credit will all be extended through 2017.
Other personal deductions and exclusions
The
following deductions and exclusions are extended through 2013:
- Discharge
of qualified principal residence exclusion;
- $250
above-the-line teacher deduction;
- Mortgage
insurance premiums treated as residence interest;
- Deduction
for state and local taxes;
- Above-the-line
deduction for tuition; and
- IRA-to-charity
exclusion (plus special provisions allowing transfers made in January 2013
to be treated as made in 2012).
Business provisions
- The
Research Credit and the production tax credits, among others, will be
extended through 2013;
- 15-year
depreciation and §179 expensing allowed on qualified real property through
2013;
- Work
Opportunity Credit extended through 2013;
- Bonus
depreciation extended through 2013; and
- The
§179 deduction limitation is $500,000 for 2012 and 2013.
Last Updated by Noel Dalmacio on 2013-01-03 09:57:12 AM