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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
The advantage of filing a joint tax return is well known – you generally save money compared to filing separately. However, there is at least one potential disadvantage. Both spouses are jointly and severally liable for the entire income tax bill, including interest and penalties, even if one earned most or all the income.
This issue most commonly arises when there are unpaid taxes from joint filing years, and a couple later separates or divorces. The IRS can pursue either spouse for the full amount. If you're the easiest one to find, or if you have liquid assets, you can end up paying the entire bill.
When this happens, the only relief is the so-called innocent spouse rule. If you can prove that you had no reason to suspect tax shortfalls and you did not personally benefit from unreported income, or that you signed joint returns only under duress, you may get off the hook. Unfortunately, this is easier said than done. The IRS and the courts have been notoriously stingy in allowing innocent spouse relief.
What can you do to head off trouble? First, consider the obvious. If your family spends much more money than the income shown on your tax returns, warning lights should go on. If you don't understand all the tax and financial issues in the joint return, ask questions. In certain circumstances, you may even want to consider hiring your own tax professional to advise you before signing.
If you are headed toward separation or divorce, it may be best to file separately. You may pay a little more tax, but that's better than leaving yourself liable for the tax sins of someone who is no longer on your side. Don't file jointly unless you're sure that all income has been reported on the return and that the taxes have actually been paid.
Last Updated by Admin on 2015-05-20 10:51:46 AM