What Is Imputed Interest (and Why Should You Care)?

Let’s say you loan money to a family member or friend and don’t charge them any interest. Seems kind, right? Well, the IRS sees it a little differently.

The Basics

The IRS has a rule called imputed interest. It means that if you give someone a loan at little or no interest, the government may pretend you did charge interest. Why? Because otherwise people could just call gifts or payments “interest-free loans” to avoid taxes.

A Simple Example

Imagine you lend your sister $10,000 and tell her she can just pay you back whenever, no interest. If the IRS’s standard rate (called the “Applicable Federal Rate” or AFR) is 4%, they might say:

• You “earned” $400 in interest (even though you never saw that money).

• That $400 has to be reported on your tax return as income.

And depending on the situation, the IRS could even treat it as though you gave your sister an extra $400 gift!

Why It Matters

• For the lender: You could owe taxes on income you never actually received.

• For the borrower: They may be treated as if they got a little extra money or a gift.

• For families: Big loans without interest can accidentally create gift tax issues.

Bottom Line

If you’re thinking about giving or receiving a loan with little or no interest, it’s a good idea to check in with a tax professional first. A little planning can help you avoid surprises at tax time.

Did you know that we offer online advisory sessions? If you have questions, you could use a professional professionals, advice, or guidance on, we would love the opportunity to meet with you.

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