Survey shows sandwich generation unaware of IRS gifting and loan tax rules

Millions of Americans fall into what has been labeled the "sandwich generation." This demographic is defined as those individuals who are providing care or financial assistance to both their aging parents and adult children. In the period immediately following the recession, the sandwich generation began to swell as more individuals lost jobs and were unable to make ends meet. Many adults or recent graduates returned to their parents' homes, and aging adults relied more heavily on children to cover medical and financial expenses.

Providing financial assistance to loved ones, whether in the form of loans or gifts, carries significant tax consequences. However, the results of a recent Harris Interactive survey conducted on behalf of National Family Mortgage reveals that many in the sandwich generation are unaware of the tax ramifications of gifting and lending. Further, this lack of familiarity also extends to rules about intrafamily real estate transfers, which have becoming increasingly common as aging parents seek to downsize their living arrangements and adult children are unable to qualify for mortgages.

According to the results, 64 percent of Americans aged 45 and older are "not at all familiar" with a lender's obligation to report earned interest income from certain loans at a rate equal to the appropriate "IRS Applicable Federal Rate" in effect at the time the loan was issued. This is the case even if no interest was paid. In addition, another 46 percent of individuals between 45 and 54 are "not at all familiar" with the annual $13,000 gift exclusion.

Timothy Burke, founder and CEO of National Family Mortgage, said unfamiliarity with tax rules can cause problems for Baby Boomers during filing season if they have not followed the proper protocols.

"Intrafamily loans and financial gifts with relatives can be a win-win for both sides, but absolutely must be structured and documented properly to prevent misunderstandings with the IRS," said Burke. "Anyone considering a loan or a financial gift with a relative or friend should first consult with their preferred tax professional, financial planner, or attorney, to ensure the transaction is a successful one."

Individuals who provide financial support to family members should speak with their tax preparer to not only avoid potential issues, but to also determine if they qualify for certain credits and deductions.

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Posted To: Tax Ranger's Blog By: Tax Ranger On: Wednesday, July 11, 2012
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