Interest you receive as income may affect your taxes
Q: Three years ago my son bought a house. I am the lender of his mortgage. Last year, unable to resist a low interest rate, I took out a bank mortgage on my own house. My son and I pay about $ 6,000 in interest annually. So, effectively, $ 6,000 is going through my hands.
Here is my question: Do I have to pay tax on the $ 6,000 of interest I receive? Is there a way to avoid being taxed on the $ 6,000 I receive? It is important in my financial situation. I am retired and this extra income affects the amount I am taxed on Social Security and could cost me other tax problems with my part-time job.
A: You ask an interesting question, but when we thought about your situation, we had to ask ourselves why you both have these loans.
After about a year, we hope that your son will have the financial means and the creditworthiness to apply for his own loan. With a decent credit score, your son should be able to get a 30-year loan with an interest rate of less than 3%. Recently we saw a lender announce a 10 year adjustable loan with an interest rate of 2.125%. The rate was set for the first 10 years and then would adjust on an annual basis until the 30th year.
The simple solution to your problem is for your son to go out and get his own loan and pay off the debt he owes you. Second, your son can probably deduct the interest payments he makes to you as long as he details his deductions. On the other hand, these interest payments are income for you.
To avoid this situation, which requires you to declare the income, we suggest that your son get his own loan. Once he has his own loan, you can decide to keep your loan (why did you take it?) And pay interest on it or pay it back. The interest you pay on your loan may be deductible on your tax return if you itemize your deductions. (For 2020, the standard deduction for an individual is $ 12,400. So if your or your son’s deductions exceed $ 12,400, you may get a tax benefit by detailing your deductions.)
Obviously, the interest you receive as income places an economic burden on you. It could affect the taxes you pay at all levels. Worse yet, it weighs you down emotionally.
If your son can’t refinance his loan, then the two of you should discuss how to handle the $ 6,000 in interest. We know of parents who forgive their children’s payments to their children on loans they may have. You have the right to give your son up to $ 15,000 without this donation causing red tape for you or your son to pay tax on this money.
We are not financial planners and cannot give you specific advice in this area, but if your son owes you $ 6,000 and you forgo the payment, you have basically given him a gift of $ 6,000 according to the IRS. You would not have to pay income tax; but, then, you wouldn’t have the $ 6,000 to pay the amount you owe on your loan. Maybe that fixes the problem.
But if you want the money, or if you need the money, your son should try refinancing and you can pay off your own mortgage along with your son’s debt repayment.
Contact Ilyce Glink and Samuel J. Tamkin through their website, ThinkGlink.com.