Many family members in Frankfort and other parts of the Chicago community help their loved ones out by loaning them money. In many cases, these loans are either officially or unofficially forgivable.
To give a practical example, few Illinois parents would honestly expect their children to repay the parents loaned their children for a house if the children are financially not able to do so.
While this is certainly not a bad thing per se, Illinois families need to remember that there are certain tax consequences to forgiving the debts of family members. Generally speaking, and to refer to the example above, if a parent forgives all or part of their children’s loan, then the children must report that forgiven debt as income on their next year’s tax returns.
Parents may try to get around this rule by calling their forgiveness of the loan a gift to their children. However, this is not always a simple matter. For one, if the gift is over a certain amount, then it may require reporting for gift tax purposes. Moreover, it must be crystal clear that the loan forgiveness was intended to be a gift in the first place.
Particularly in situations in which family members offer assistance to one another, the line between what is and is not a gift, as well as other important legal distinctions, can get blurred to the point where a full-blown tax controversy erupts and an Illinois resident finds herself in a roil either with the IRS or with state regulators. The stakes are often high in these situations, as the end of this sort of legal battle could be thousands of dollars in additional tax liability as well as significant penalties and interest.
While skilled and well-thought gift and estate planning can help prevent these sorts of legal woes, sometimes a resident will want or even need to get professional legal assistance to resolve a tax dispute.