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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
Now
that the holiday season has arrived, you might decide to step up your
charitable donations to boost your deductions for 2013. Here are six timely
strategies.
1.
Audit-proof your claims. The IRS imposes strict substantiation rules for
charitable donations. In fact, you're required to keep records for all monetary
contributions, no matter how small. The best approach is to obtain written
documentation for every donation.
2.
Charge it. The deductible amount for 2013 includes charitable gifts charged by
credit card before the end of the year. This covers online
contributions using a credit card account. So you can claim a current deduction
for donations made as late as December 31.
3.
Give away appreciated stock. Generally, you can deduct the fair market value
(FMV) of capital gain property owned longer than one year. For instance, if you
acquired stock ten years ago for $1,000 and it's now worth $5,000, you can
deduct the full $5,000. The appreciation in value isn't taxed.
4.
Sell depreciated stock. Conversely, it usually doesn't make sense to donate
stock that has declined in value, because you won't receive any tax benefit for
the loss. Instead, you might sell the stock and donate the proceeds. This
entitles you to a capital loss on your 2013 return plus the charitable
deduction.
5.
Clean out the storage space. The tax law permits you to deduct charitable gifts
of used clothing and household goods that are still in "good used
condition or better." Don't be so quick to discard items that can be
donated to charity.
6.
Donate a car. The deduction for a donated vehicle valued above $500 is
generally limited to its resale amount. However, if the charity uses the
vehicle for its tax-exempt purposes, you may be able to deduct its fair market
value.
Call
us for more details on the tax rules governing charitable contributions.
Last Updated by Tax on 2013-12-12 02:32:27 PM