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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 end of the year is the traditional time for securities
investors to "harvest" capital losses for federal income tax
purposes. But there's an added wrinkle in 2012: Due to pending tax law changes,
you might try to reap more capital gains than losses. Thus, the usual strategy
of harvesting losses could be turned upside down.
Here's a recap of the basic rules. The capital gains and
capital losses you realize during the year are "netted" under complex
rules when you file your tax return. A gain or loss is treated as being
long-term if you've held the securities for more than one year. For 2012, net
long-term capital gain is taxed at a maximum tax rate of 15% (0% for investors
in the regular 10% and 15% tax brackets).
If you're showing a net capital gain on paper as year-end
approaches, any capital losses you realize will reduce the amount of the
taxable gain or offset it completely. An excess loss can then offset up to
$3,000 of highly taxed ordinary income before any remainder is carried over to
next year. However, the usual strategy of harvesting losses is complicated this
year by three key tax law changes scheduled for 2013.
1. The maximum tax rate for net long-term capital gain will
increase to 20% (10% for investors in the lower tax brackets).
2. Ordinary tax rates are going up. For example, the top
rates of 33% and 35% will increase to 36% and 39.6%, respectively.
3. A special 3.8% Medicare surtax will apply to the lesser
of net investment income for the year or the amount by which modified adjusted
gross income (MAGI) exceeds $250,000 ($200,000 for single filers).
Barring any late legislation by Congress, investors may be
inclined to harvest capital gains instead of losses at year-end. As a result,
you can benefit from the favorable tax rates in effect for 2012. If you've
already realized short-term gains in 2012, you might want to realize short-term
losses to offset those gains. But don't use short-term losses to offset
long-term gains, if you can help it, because long-term gains are taxed at a
maximum rate of only 15% in 2012.
Other considerations may come into play. The best approach
is to do what's best for your situation. Contact us for assistance in reviewing
your options.
Last Updated by Noel Dalmacio on 2012-08-24 03:15:04 PM