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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
If you do volunteer work for a charitable organization and have not kept track of your out-of-pocket expenses, you might be passing up an excellent opportunity to lower your tax bill. To qualify, your unreimbursed expenses must relate directly to the charity, and you must itemize your deductions on your tax return. Here is a brief rundown of some possible deductions.
* Volunteers may deduct the cost of phone calls, postage stamps, supplies, and other out-of-pocket costs incurred in their volunteer work. For volunteers who are required to wear a uniform, the cost of buying and cleaning uniforms is deductible if they are unsuitable for everyday wear.
* The cost of your time, no matter how valuable it may be, is not deductible. That's true even if you would normally be paid for the type of service you contribute. For instance, accountants who perform free consulting for charities can't deduct what they would normally charge for their services.
* Using your car in connection with volunteer work can earn you a deduction. The standard mileage rate for volunteers who use their own cars is 14 cents per mile. Alternatively, you may deduct your actual unreimbursed expenses for gas and oil - but not maintenance, depreciation, or insurance. Either way you choose, related parking fees and tolls are deductible as well.
* If you travel overnight for charitable purposes, your expenses are deductible as long as they are reasonable in amount and not connected with personal activities or any element of recreation.
* Special rules apply to conventions. Travel and other out-of-pocket expenses related to attendance at a convention for volunteers are deductible only if you have been chosen as a delegate to represent the organization.
Finally, just remember that it is up to you, the volunteer, to substantiate your deductions. If you take these deductions, you should be prepared to show the IRS the connection between the costs claimed and the charitable work performed.
Last Updated by Admin on 2014-09-18 04:58:42 PM