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Lending cash to the kids? Stick to tax-law boundaries

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in Small Business Tax,Small Business Tax Deduction Strategies

Now that your child has graduated from college, you want him or her to start off on the right foot. Maybe your child needs seed money for a business venture or a new car for a long-distance commute.

Strategy: Give your child a low-interest, or even a no-interest, loan. If you stay within the tax-law boundaries, your family will have no tax worries. However, if you’re not careful, you could wind up facing an unfavorable tax outcome.

With interest rates remaining on the low side, this is a good time (from a gift-tax perspective) for a loan.

Here’s the whole story:  The tax law frowns on intrafamily loans in which you don’t charge any interest or you charge interest at a below-market rate.

Under the below-market loan rules, interest may be imputed under a three-step process:

1. You are deemed to charge imaginary interest to the borrower.

2. You are deemed to make a gift to the borrower to cover the imaginary interest.

3. You are deeme...(register to read more)

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