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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
There's
not much time left for you to make beneficial tax moves for 2013. Consider
these possibilities.
*
Maximize retirement plan contributions. For 2013, you can put $17,500 in a
401(k) plan, $12,000 in a SIMPLE, or $5,500 in an IRA. If you're 50 or older,
you can set aside even more as "catch-up" contributions.
*
Decide whether to sell investments to offset gains or losses already taken this
year. You can deduct $3,000 of net losses against ordinary income.
*
Estimate your tax liability for 2013, taking the new Medicare tax increases for
higher-income taxpayers into account. If you'll be underpaid, adjust your final
quarterly tax payment or your December withholding.
*
December 31 is the deadline for taking a 2013 required minimum distribution
from your traditional IRA if you're 70½ or older. Miss this requirement and a
50% penalty could apply.
*
Purchase needed business equipment to use the first-year $500,000 expensing
option for new and used equipment and 50% bonus depreciation for new equipment.
*
Make energy-saving home improvements that could qualify for a lifetime tax
credit of up to $500.
*
Finalize annual gifts to use the 2013 exclusion from gift tax on gifts of up to
$14,000 per recipient.
Contact
our office for details on these and other year-end tax moves.
Last Updated by Tax on 2013-12-04 12:56:07 PM