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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
Most taxpayers believe that a "dependent" is a
minor child that lives with them. While that is essentially correct, dependents
can include parents, other relatives and nonrelatives, and even children who
don't live with you. There is really much more to the dependent deduction than
you might at first imagine.
* Exemptions and your taxable income. For 2012, each
dependent deduction is worth $3,800, reducing your taxable income by this
amount. In 2013, the deduction increases to $3,900 and is phased out for
high-income taxpayers.
* Dependents defined. It's impossible to present all of the
rules relative to dependents here, since they are so complicated. Generally
speaking, if somebody lives with you and you provide more than half of that
individual's support for the entire year, there is a good chance that person is
a dependent. There are many exceptions. For example, parents don't have to live
with you if they otherwise qualify, but some other relatives do. A child of
divorced parents doesn't necessarily have to live with the noncustodial spouse
for the dependent deduction to apply.
* People who can't be claimed. Generally, you may not claim
a married person as a dependent if that person files a joint return with a
spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or
a resident of Canada or Mexico for part of the year.
* One dependent deduction per individual. If you claim
yourself as your own dependent, anybody else who can truly meet the tests and
claim you as a dependent will lose out. This is common for college students who
file their own tax returns for their part-time jobs, while mom and dad really
meet all of the qualifications to claim the dependent exemption.
While the dependent deduction might seem relatively minor,
it can lead to other deductions on the tax return. In order to claim the child
tax credit, the education credits, the dependent care credit, for example, you
must claim the dependent deduction for the child that qualifies for the
deduction or credit.
Finally dependent deductions can be negotiated, which is
especially important for divorced taxpayers. In the past, the IRS would accept
the language of the divorce decree to allow the noncustodial parent the
dependent deduction. However, under the current rules, the IRS will no longer
accept a divorce decree in lieu of IRS Form 8332 (Release of Exemption).
Last Updated by Noel Dalmacio on 2013-02-20 01:23:46 PM