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Cash. And Taxes.
November 16, 2011 6:26 PM   Subscribe

A friend owes me $8k to $12k. What tax laws do I need to know?

Because it didn't matter, I paid rent for a majority of our time while living together. I didn't cash a few checks from my friend, with their knowledge, so the total is between $8k and $12k (to be determined).

There's no animosity, and we just basically need to settle up. What do I need to think about with regards to such a large sum of money? Is there a tax penalty with a certain amount? What do I need to think about here?
posted by glaucon to Work & Money (7 answers total) 2 users marked this as a favorite
So long as it is less than 13k, it should be tax free under gift tax provisions.

(not an income tax accountant)
posted by politikitty at 6:29 PM on November 16, 2011

I'm not your lawyer and I think I have a fever -- so take this with a grain of salt.

But I don't think you have any income here. It's also not a gift. It's a repayment of loan principal. If you charged any interest, you would have interest income. But the repayment of principal is not income (how unfair would that be!).

So you should not owe any income taxes.

There may be some kind of automatic banking reporting triggered by such a large deposit, I have no idea.
posted by grobstein at 6:36 PM on November 16, 2011 [1 favorite]

I am not an accountant, nor a lawyer... But, if your friend *owes* you money because you effectively lent him/her some (through paying rent for them), how could that be ever consider an income to you when (s)he pays you back?
posted by aroberge at 6:39 PM on November 16, 2011

There's no income here. It's money he owed you for rent. This shouldn't change your tax situation.

Exception: if you add on interest charges, that is income that you should declare on your 1040 Schedule B.

Gift tax shouldn't enter into it either, since it's not a gift.
posted by grouse at 6:39 PM on November 16, 2011

The interest on the loan is considered income if the loan is more than $10,000. See Motley Fool.
posted by desjardins at 6:40 PM on November 16, 2011

If you're writing off part of the loan, you might be able to get a deduction on it. That is, assuming there aren't arms-length restrictions. Ask a tax accountant (note: do not go to H & R Block and similar low-rent orgs or individuals, go to a C.P.A. or your equivalent)
posted by Yowser at 6:58 PM on November 16, 2011

The interest on the loan is considered income if the loan is more than $10,000.

That's not a correct summary of the situation or that page (loan interest income is still income even if it is less than $10,000), but it does bring up something that I didn't know about and that no one has commented on yet.

If you don't charge interest on the loan, it is more than $10,000, and your roommate has more than $1,000 in net investment income from all sources, then you have to pay taxes on the foregone interest of the loan at the applicable federal rate, and then treat that amount as a gift back to your roommate. Assuming that he does, and that this loan is for less than three years, then the current rate is 0.19% compounded annually, which would be $23 on a loan of $12,000 for a year. Then you would have to pay tax of 10%–35% of that depending on your marginal tax bracket. And revise income tax for previous tax years (if any) where the loan was more than $10,000.

I imagine that an accountant might know how to get you out of this, if that is the state of affairs. Although it's not that much money ($8 per year tops).
posted by grouse at 7:07 PM on November 16, 2011 [3 favorites]

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