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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.
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Are you thinking of getting a divorce? Before you jump and do anything, I would recommend that you read this blog to know the eight important things about the 2018 alimony tax changes.
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
Here are eight things you need to know about the 2018 alimony tax changes:
- Effective date - any divorce agreement executed after 12/31/18.
- New 2018 tax law - alimony payments are no longer deductible and alimony income is no longer included as income.
- Grandfathered payments - any alimony paid based on a divorce agreement in place on or before 12/31/18 remains deductible by the payor spouse and included as income for the recipient spouse
- Modified agreements - the old tax rule still applies unless the agreement expressly states that the new 2018 tax law applies. That means, that the modified agreement will lose its grandfathered payments and status.
- Timing - if you are thinking of filing for a divorce in 2018, it is very important to time the divorce/alimony settlement before 12/31/18.
- State conformity - determine if your resident state agrees with the federal law. For example, in California, they still allow the alimony deduction and inclusion in income.
- Tax strategy - make sure that you account for the federal and state tax effect of the alimony payments or receipts when you are working with your attorney.
- Reason for change - Congress called the alimony deduction a “divorce subsidy”. They argued that divorced couples can benefit more compared to a married couple. So they want to treat alimony as a non-deductible child support. The Joint Committee on Taxation estimates that this tax change will add almost $7 billion in tax revenues over ten years. Wow!
To recap, make sure you remember these eight important things in case you are getting a divorce.
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.
Last Updated by Admin on 2018-05-31 10:26:20 PM