Family Loans: What Does the IRS Think When You Lend Money to Your Kids?

Family Loans: What Does the IRS Think When You Lend Money to Your Kids?

Taxes| Accounting| Finance| Lifestyle
June 23, 2025•3 min read

Published Date: June 23, 2025

Published By: Jac Cantos, Upcloud Accounting

Helping your kids financially is a natural part of parenting. But when you lend money to family, does the IRS take notice? Upcloud Accounting clarifies the rules surrounding family loans and gift tax implications.

Key Takeaways on Family Loans

  • Small Loans: The IRS generally isn't concerned with small loans (under $10,000) to immediate family members.

  • Interest on Significant Loans: Charging interest on loans over $10,000 can help avoid gift tax issues.

  • Bad Debt Deduction: If your child doesn't repay the loan, you may be able to take a bad debt deduction.

When Does the IRS Care About Family Loans?

The IRS focuses on larger loan amounts and whether the loan is treated as a genuine loan or a disguised gift.

Scenario 1: Interest-Free Loans

  • For loans exceeding $10,000, consider charging interest.

  • If you don't charge interest, the IRS may consider the foregone interest a gift.

  • The annual gift tax exclusion is $19,000 per recipient in 2025.

  • The minimum interest rate should be based on the Applicable Federal Rate (AFR) or the borrower's net investment income.

Scenario 2: Loans Disguised as Gifts

  • The IRS scrutinizes loans that are not legally enforceable.

  • Formal loan agreements are essential.

  • Seek legal advice to create a legally sound loan agreement.

Scenario 3: Student Loans for Tuition

  • You can provide student loans to your children.

  • Your children can deduct student loan interest paid to you.

  • You must report the interest income to the IRS and pay income tax on it.

Scenario 4: Bad Debt Deduction

  • If your child doesn't repay the loan, you can take a non-business bad debt deduction.

  • Prove the debt is worthless and you attempted to collect it.

Scenario 5: Filing a Gift Tax Return

  • If the IRS deems your loan a gift, you may need to file Form 709.

  • You only owe gift tax if your lifetime gifts exceed the lifetime gift tax exclusion ($13.99 million in 2025).

Family Loan Safe Harbors

  • Loans of $10,000 or less, where the funds aren't used for investments.

  • Loans of $100,000 or less, where the child's net investment income is $1,000 or less.

Navigating family loans and their tax implications can be complex. Upcloud Accounting provides expert guidance to ensure you comply with IRS regulations and optimize your family's financial well-being.

Upcloud Accounting: Virtual Outsourced Accounting and Bookkeeping Services in the Philippines

Upcloud Accounting provides reliable, tech-enabled virtual accounting and bookkeeping services designed for startups, freelancers, and growing small businesses across the United States. Our team of experienced accountants and bookkeepers delivers streamlined financial management so you can focus on scaling your business, without worrying about the back-office workload.

We specialize in increasing efficiency, automation, and transparency across your financial operations using modern cloud accounting tools. Whether you're a solo entrepreneur or an expanding company, our flexible and affordable bookkeeping plans ensure you get expert support at every stage of growth. For inquiries, contact our team at [email protected] or visit www.upcloudaccounting.com to learn more.

Disclaimer: This content is for general informational purposes only and should not be considered professional financial or legal advice. For guidance tailored to your specific business needs, please consult with a licensed accountant or tax advisor. For questions, comments, or feedback, feel free to email us at[email protected].

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