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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
Do you usually feel charitable during the holidays? Before, you give your check to a charity organization though, you need to do a little bit of a homework.
Hi guys, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
Normally, many charities use your donations wisely. Unfortunately, others spend too much of your contribution on fundraising and administrative expenses. Some even misrepresent themselves and ask for your money for phony causes. In today's world, investigating a charity before you make a donation is the smart way of doing it.
Here's a checklist on how you can protect yourself:
- Number 1. You have to request a written documentation about the charity's mission and how your contribution will be spent. You have to ask for proof that your donation is tax deductible. If a charity is reluctant to provide information, think twice about making a gift.
- Number 2. When you receive a phone solicitation, the caller must provide their name, charitable organization name, telephone number and address. If a caller refuses to give you this information, hang up. Report the call to local authorities to help protect others.
- Number 3. Do not provide your credit card number over the phone. Instead, consider mailing your contribution once you've confirmed that the charity is legitimate and that it represents a cause you'd like to support.
- Lastly, number 4. Just because an organization gives you a receipt for your records doesn't mean the organization is tax-exempt or that your contribution is tax-deductible. To find out if an organization is exempt from federal income tax and how much of your contributions to it are tax deductible, visit the IRS website at irs.gov and type in “EO select check”. Once your there, type in the organization’s info.
Asking the right questions and obtaining information about a charity is the only way you can be sure your contribution will be used to benefit the causes and people you want to support.
If you like to learn more, click the link lowermytaxnow.com and subscribe to my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
Last Updated by Admin on 2015-12-17 01:10:23 PM