Tax deduction on Educational loan to a friend?
May 6th, 2010One of my friends is doing his Masters in US. I was planning to lend him some money to pay his fees. He also plans to return the money after he graduates with an interest rate. But I have some questions about that. Will I be eligible for tax deduction on the money I lend him? Is the interest that he pays to me taxable? If so, what kind of document do I need to show my interest income from my friend? Are there any other complications that I should be aware of? Any do’s or don’ts?
Replys
Get a written contract specifying all the elements of a loan – Principal loaned, interest rate and payment schedule. 85% of loans to relatives and friends are never repaid and lead to fights. if he pays interest it is taxable as interest income just like the interest you get from the bank. Principal payments on a loan are not tax deductible.
no you cannot claim this as a tax deduction.
No, you can’t take a deduction for making the loan – and yes, the interest he pays you is taxable.
Do some legally binding paperwork in case he doesn’t willingly pay you back when agreed.
The loan is not deductible unless it’s uncollectible in the future; then it would be taxable to him (Schedule A). The interest income is taxable and reportable on 1040 Schedule B or 1040A Schedule 1. Make sure you document everything, or use an attorney if it’s a substantial amount.
if your friend steals it….(wont pay back) then you can deduct the amount you loaned.
see sch A for the space where you would report that….however, be aware that it must be a very substantial amount in order for it to make a dent in your tax liability. the standard deduction may cover your loss so you wont have to itemize this loss.
if you ever do collect, then you will have to add it to income if you do itemize it.
and of course, any inerest paid to you will be taxable.
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