Gift taxes
My father is currently retired with on SSI as any kind of income. He has $30k someone loaned him many years ago who'd now like it back. There was no paperwork or anything it was between friends. My father has not gifted anything significant in his lifetime. Would he be subjected to paying taxes on the $30k if he gave it all at once? Since he's retired and only on SSI, I'm not even sure if he does yearly taxes anymore.
Answer:
Seeing that there was no paperwork to document the loan, I assume no interest was ever paid. While the intention may have been for it to be treated as a loan, neither party behaved like it was a loan (by having a written promissory note, periodic payments, interest to be paid, etc.).
If your father every got audited and this issue arose in audit, he would first have to prove that the receipt of the $30,000 was not income to him. Again, it’s difficult for your father to assert it was a loan when it was never treated as such. Assuming that you could prove it was not income, then the IRS might argue that it was a loan (if that was in the IRS’ best interest). If the IRS could win on that front, they’d go after your father’s friend for imputed interest income, as you can’t have a loan with no interest. However, if it ended up being treated as a gift, I recommend the following.
To keep things simple, your father should repay the $30,000 in two pieces, making sure not to exceed the annual exclusion (presently $15,000) by giving no more than $15,000 each calendar year. So it would take two payments – one for $15,000 this year (2021) and the second for $15,000 next year (2022). By doing it this way, your father would not need to file a gift tax return for the total transfer of $30,000 back to his friend. Also, your father would not need to pay any tax.
To summarize, I would assume it was a gift all along and take the aforementioned steps to do damage control. Of course, it would have been better to simply have done things right from the beginning, rather than try to find a legal way out of the mess later.
Adam Dickreiter
