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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
Want to lower your 2013 tax bill? The time for action is
running out, so consider these tax-savers now.
* You can choose to deduct sales taxes instead of local and
state income taxes. If you're planning big ticket purchases (like a car or a
boat), buy before year-end to beef up your deductible amount of sales tax.
* If you're a teacher, don't overlook the deduction for up
to $250 for classroom supplies you purchase in 2013.
* Consider prepaying college tuition you'll owe for the
first semester of 2014. This year you can deduct up to $4,000 for higher
education expenses. Income limits apply.
* Max out your retirement plan contributions. You can set
aside $5,500 in an IRA ($6,500 if you're 50 or older), $12,000 in a SIMPLE
($14,500 if you're 50 or older), or $17,500 in a 401(k) plan ($23,000 if you're
50 or older).
* Establish a pension plan for your small business. You may
qualify for a tax credit of up to $500 in each of the plan's first three years.
* Need equipment for your business? Buy and place it in
service by year-end to qualify for up to $500,000 of first-year expensing or
50% bonus depreciation.
* Review your investments and make your year-end sell
decisions, whether to rebalance your portfolio at the lowest tax cost or to
offset gains and losses.
* If you're charity-minded, consider giving appreciated
stock that you've owned for over a year. You can generally deduct the fair
market value and pay no capital gains tax on the appreciation.
* Another charitable possibility for those over 70½: Make a
direct donation of up to $100,000 from your IRA to a charity. The donation
counts as part of your required minimum distribution but isn't included in your
taxable income.
* Install energy-saving improvements (such as insulation,
doors, and windows) in your home, and you might qualify for a tax credit of up
to $500.
These possibilities for cutting your taxes are just the
starting point. Contact us now for a review of your 2013 tax situation and
tax-saving suggestions that will work best in your individual circumstances.
Last Updated by Tax on 2013-10-30 10:41:20 AM