Question

In: Accounting

On July 1, 2020, Katerina made a $90,000 interest-free loan to her son, Dominic, who used...

On July 1, 2020, Katerina made a $90,000 interest-free loan to her son, Dominic, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Dominic’s only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. Assume the relevant Federal interest rate is 8% compounded semiannually.

Required: Determine the effect of the loan on Katerina’s gross income for 2020. Provide explanations and supporting computations to support your answer to receive full credit.

Solutions

Expert Solution

Ans :

As a parent, there’s a chance we may lend our kids money throughout life. Maybe it’s to buy a bike, to get their first car or even to purchase their very own home. Internal Revenue Service (IRS) doesn’t care about small loans. The IRS isn’t concerned with most personal loans to your son or daughter. They also don’t care how often loans are handed out, whether interest is charged or if you get paid back. In 2019 and 2020, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it.

But if the amount is significant Like to buy a house or so , which is in this case applicable , it is important to charge Interest .

If you don’t, the IRS can say the interest you should have charged was a gift. In that case, the interest money goes toward your annual gift giving limit of $14,000 per individual. If you give more than $14,000 to one individual, you are required to file a gift tax form.

The rate of interest on the loan must be at least as high as the minimum interest rates set by the IRS.

There is an exception when interest-free loans between individuals do not constitute a taxable gift. When the amount of the loan does not exceed $10,000 no taxable gift or deemed interest income and expense is created. This exception does not apply, however, when the interest-free loan is for the purchase or carrying of income-producing assets.

Further, for one or more interest-free loans directly between individuals of $100,000 or less, the amount of interest income and expense treated as retransferred by the borrower to the lender at the close of any year may not be exceed the borrower’s net investment income for that year. However, this limitation does not apply where one of the principal purposes of the loan arrangement is the avoidance of federal tax.

Hence the effect of loan given to her son is that the loan is treated as gift and income of Katerina will include = 90000 * 8% = $ 7200   


Related Solutions

A fully amortizing mortgage loan is made for $90,000 for 15 years. The interest rate is...
A fully amortizing mortgage loan is made for $90,000 for 15 years. The interest rate is 6 percent per year compounding monthly. Payments are to be made monthly. What is the principal payment in the first monthly payment?
1. In 2020, Elaine paid $2,440 of tuition and $1,160 for books for her dependent son...
1. In 2020, Elaine paid $2,440 of tuition and $1,160 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband. What is the maximum American opportunity tax credit that Elaine can claim for the tuition payment and books in each of the following alternative situations? (Leave no answer blank. Enter zero if applicable.) Elaine’s AGI is $88,000. What is the American opportunity tax credit? 2. In...
In 2020, Elaine paid $2400 of tuition and $1020 for books for her dependent son to...
In 2020, Elaine paid $2400 of tuition and $1020 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband. What is the maximum American opportunity tax credit that Elaine can claim for the tuition payment and books in each of the following alternative situations? a. Elaine's AGI is $99,750 b. Elaine's AGI is $166,500 c. Elaine's AGI is $213,500
A small business takes out a $100,000 loan on April 1, 2020. The loan interest rate...
A small business takes out a $100,000 loan on April 1, 2020. The loan interest rate is j4 = 6%. They are to repay the loan with quarterly payments of $4,000 for 5 years (first payment on July 1, 2020), followed by n quarterly payments of 5,000 for as long as necessary. Determine the total number of loan payments made and both the amount and calendar date of the smaller final payment made one quarter after the last 5,000 payment.
On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the...
On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the loan is 10% payable annually starting on December 31, 2019. The loan matures in three years on December 31, 2022. Principal amount 5,000,000 Direct origination cost incurred 457,500 Origination fee charged against the borrower 200,000 After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 8%. Determine the carrying amount of the...
On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the...
On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the loan is 10% payable annually starting on December 31, 2019. The loan matures in three years on December 31, 2022. Principal amount 5,000,000 Direct origination cost incurred 457,500 Origination fee charged against the borrower 200,000 After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 8%. Determine the carrying amount of the...
On July 1, 2020, a company borrows $500,000 under a long-term loan. The $500,000 will be...
On July 1, 2020, a company borrows $500,000 under a long-term loan. The $500,000 will be paid back in five annual instalments of $100,000 each, starting on June 30, 2021. What will be the company's long-term loan balance, shown in the long-term liability section of its statement of financial position, at December 31, 2021? a)$400,000. b)$350,000. c)$300,000. d)Cannot tell, as the interest rate on the loan has not been provided
Mr. Green took a loan of $10,000 to buy a used car for his son. The...
Mr. Green took a loan of $10,000 to buy a used car for his son. The interest rate on the loan was 12% per year, and the lender agreed to take an annual payment for 5 years. What is the amount of principal he paid at the time of the second payment? Please show solution
On July 1, 2020, Buffalo Inc. made two sales. 1. It sold land having a fair...
On July 1, 2020, Buffalo Inc. made two sales. 1. It sold land having a fair value of $904,970 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,423,984. The land is carried on Buffalo's books at a cost of $596,000. 2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $409,570 (interest payable annually). Buffalo Inc. recently had to pay 8% interest for money that it borrowed from...
On July 1, 2020, Culver Inc. made two sales. 1. It sold land having a fair...
On July 1, 2020, Culver Inc. made two sales. 1. It sold land having a fair value of $917,020 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,442,944. The land is carried on Culver's books at a cost of $590,500. 2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $408,520 (interest payable annually). Culver Inc. recently had to pay 8% interest for money that it borrowed from...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT