Interest-free loan – how it works and tax traps
“Interest-free loan” – functions, pitfalls and advantages
Interest-free loan … that sounds like a tempting offer and like music to a debtor’s ears. After all, it means that the person who uses it has no additional costs. Only money is accepted and maybe “thank you” is said. An interest-free loan can already be understood to mean the financial outlay of a friend who took the last drink in the evening into his account because his own wallet was no longer enough. Interest-free loans therefore use a broad definition. If these are “blotches”, no rooster crows as to who paid for the last beer in the pub and whether that was the case every week. But be careful if these amounts of money exceed a certain limit. Then the tax office would also like to know which ways your money went.
Interest-free loans can become a tax trap
Interest-free loans, even among friends or within the family, can turn out to be a tax trap. If the tax-free allowance is exceeded and the loan or loan runs for a longer period than just one year, gift taxes apply officially, whether among friends or in the family. Yes, one can hardly believe it, but there is also a gift tax after the wages, compensation, VAT etc. So we want to do ourselves a favor and then that? Well, at least we know first. In our guide, we are now giving you important points that you should know before you want to give a loan to someone in your family, friends or colleagues, and certainly only because you like and want to help people. In the following, you will learn how not to pit yourself and others if you actually want to do them a favor.
Pitfalls of an interest-free loan
Interest-free loans can become real tax traps. Due to the unpredicted interest, the tax authorities can (and rightly so) assume that this is a gift. In the cases where allowances are exceeded and that If the loan exceeds the period of one year, a gift can be accepted and a gift tax can be assessed accordingly. In families, these allowances are hardly exceeded; despite everything, donors and gift recipients should keep an eye on this tax liability so that a good deed is not disadvantageous for both.
Avoid gift tax – pay attention to allowances!
When granting a loan among friends or acquaintances, one should in particular inquire about allowances and, if possible, not exceed them. The personal allowance is currently 20,000 USD. Within a 10-year period, an interest-free loan can be granted in this monetary value as assumed. Everything else is taxed by the tax office. Family donations are a little different. There, the allowances are higher than, for example, among friends.
In the event that amounts are exceeded and a donation must be assumed, the tax authorities can set a fictitious interest rate of 5.5% pa Even a very low interest rate does not protect against this. Focus-Money points out that an interest rate of 3% pa is at least a partial gift. In this case, the difference between the actually decided and the fictitious interest rate is formed. In the next point, we would be happy to explain which relationships, tax-free amounts play a role in gift tax.
Regulation of gift tax
As soon as a donation of money exceeds a certain amount, it only depends on the relationship of the two people to each other, which taxes are claimed according to the bank. Based on the situation that the gifted person achieves an increase in wealth, the process becomes tax-relevant. The division is then made according to the appropriate tax class, relationship between the gift recipient and the recipient as well as the amount of the gift itself. Our overview page shows you this below:
According to the classification, most taxes have to be paid by persons in tax class III. The rate can range from 30 to 50 percent. It depends on the amount of the gift. Furthermore, personal allowances always count, of course, which could not be considered in the table and which depend on the life situation of the person.
Accordingly, we advise you to deal with donations of any kind if you feel that it is a horrendous amount. Because as good as someone means to you, both financial partners can put themselves in the nettles. Of course, you can also look forward to the gift that is given to you. Say thank you, don’t forget!