Do I have to claim a loan repayment as income?

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Lin
Lin Member Newcomer

I loaned my daughter money from my IRA in 2017 and paid taxes on that withdrawal. She is planning to pay back the loan in 2024. Will I need to pay taxes on this loan when it is repaid?

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  • rachels
    rachels FreeTaxUSA Agent
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    Hi Lin,

    If the loan is comprised of money that you already paid taxes on, you will generally not need to report the return of the principal as income.

    Did you receive interest on the loan? Interest received from a loan is reportable as income on your tax return.

    Even if you are not getting interest from the loan, you may need to report as income the interest you could have charged on the loan. This will depend on the nature and the amount of the loan. IRS publication 550 states:

    "If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan…For any period, forgone interest is:

    • The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus
    • Any interest actually payable on the loan for the period."

    There is one particular exception that may be helpful for you, depending on your situation:

    "The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. This exception applies only to:

    1. Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and
    2. Compensation-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement."

    "A gift loan is any below-market loan where the forgone interest is in the nature of a gift."

    So, in most cases, if it was a gift loan of $10,000 or less, you will not need to report as income the forgone interest.

  • Lin
    Lin Member Newcomer
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    hmmm….I am not sure that this answers my question. Maybe I should clarify further. I have been receiving interest payments on the loan and I have been reporting those payments as income each year.

    so that is not forgone interest. Any interest that I would receive in 2024 would need to be reported on my 2024 taxes but would the entire amount of $50,000 be taxed? Or should I have her pay me back $10,000 a year for 5 years

  • rachels
    rachels FreeTaxUSA Agent
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    Hi Lin,

    The repayment of principal (ex/ the $50,000 you loaned her) is not taxable to you. It is simply a repayment to you of money that you previously paid tax on. It is generally just the interest you receive that you need to report as income on your tax return.

    The $10,000 limit I mentioned earlier is related to below-market loans. It shouldn't make a difference if the principal is paid back to you all at once or in smaller increments.