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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
As the population in the U.S. continues to age, more and
more people will find themselves caring for their parents. Here are some of the
tax breaks that caregivers should consider.
* If you provide more than half of your parent's support,
you may be able to claim your parent as a dependent on your tax return. To be
eligible, your parent can't earn more than $3,900 in 2013, excluding their
nontaxable social security and disability income.
* What if you and your siblings all pitch in to support a
parent? Anyone who contributes at least 10% of the total support can be the one
to claim the $3,900 exemption if all of you sign a multiple support agreement.
* Even if a parent's income exceeds $3,900 this year, you
can still deduct the medical expenses paid on the parent's behalf, as long as
you provide more than half of his or her support.
* If you hire someone to take care of your parent while you
work, you might qualify for the dependent care tax credit. Your parent must be
physically or mentally incapable of caring for himself.
* Unmarried individuals who support a parent can file their
tax returns as "head of household." To qualify, your parent doesn't
need to live with you. Instead, as long as you pay more than half of the cost
of maintaining your parent's main home, including a rest home or nursing
facility, you qualify for this preferential tax treatment.
For more information about the tax issues affecting
caregivers and their parents, please give us a call.
Last Updated by Tax on 2013-11-13 10:18:21 AM