What is Applicable Federal Rates used for?

I want to make a legal loan to my son and want to charge him the lowest legal interest rate. I have heard about the Applicable Federal Rate (AFR) and I think this may be it. I know, of course that I can charge him no interest but I don't want to make a gift and I want to be able to deduct it as a bad debt if he fails to pay it off so I know I have to use the lowest legal rate. Can somebody help explain where i can find it?

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  • Anonymous
    9 years ago
    Favorite Answer

    1. You don't have to charge him interest.

    2. You still must impute the interest using the AFR.

    3. That interest is taxable income to you.

    4. If you do not charge the interest, you are making a gift of it. If the interest exceeds $13,000 in one year, you would have to file a gift tax form.

    5. Do not lend the money if you are already planning on claiming it as a bad debt. The IRS will see through this and call it a gift and disallow any deduction. You'd have to show that you took collection efforts--that is sue him--to get the money first.

    6. To get current rates, go to irs.gov and type AFR in the search box.

  • Bobbie
    Lv 7
    9 years ago

    And for this purpose you will have to have a written legal collectible loan agreement and then make every legal effort to collect it before it can be written off as a bad debt loss during that tax year.

    http://www.irs.gov/app/picklist/list/federalRates....

    Index of Applicable Federal Rates (AFR) Rulings

    http://www.irs.gov/pub/irs-drop/rr-12-13.pdf

    Hope that you find the above enclosed information useful. 05/05/2012

  • tro
    Lv 7
    9 years ago

    if you issue the note with the interest rate that is accepted by IRS that will be in compliance, you can state a rate higher if you choose, but not less if you ever were to contest the payment

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