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Video instructions and help with filling out and completing Imputed interest rules

Instructions and Help about Imputed interest rules

My name is Kevin Burke I'm a certified financial planner professional and author of the book make your money last a lifetime imputed interest is just what it sounds like it's imputed it's not necessarily or it is not interest that you've actually received so as an example some might even call it phantom income that would be where the income is attributed to you or imputed to you even though you didn't actually receive a check for it well why that is important is because if you have imputed interest and there are some investments where the interest is imputed to you even though you don't have physical receipt of the money you still might owe income tax on that interest and so you have to keep track of that and in fact you'll get a 1099 at the end of the year saying that you receive this computed in turist even though you never got the money in your pocket another reason imputed interest is important where it comes in is something called the AFR's applicable federal rates applicable federal rates when might that come into play well some people like to play games and so the government has come up with with this formula let's say that man named Jim sells a million dollar property to a man named Bob and their agreement is that Bob pays Jim a hundred thousand dollars per year for 10 years well if that's what were to happen then it would appear as if there was no interest paid on the loan of a million dollars and so the government doesn't allow that you have to charge some sort of interest rate in that case otherwise what's happening is Jim is selling the property and trying to claim it as full capital gains which is a lower tax rate so what would happen is there would be an imputed interest implied by their arrangement so some of what Bob was paying the hundred thousand dollars per year would be considered payment for the principal but there would be a an interest rate applied to it an applicable federal rate that would then be a tax Levent to jim he would have to declare this income so this this idea of imputed interest has a couple of different meanings but that's the definition and how imputed interest comes into play.

FAQ

What is the purpose of imputed interest?
What Is Imputed Interest? The IRS uses imputed interest to collect tax revenues on loans or securities that pay little or no interest. Imputed interest is important for discount bonds, such as zero-coupon bonds and other securities sold below face value and mature at par.
When Should interest be imputed?
If you loan someone money at no interest, or at 0.25%, or at any rate below 2.88%, you have to deal with imputed interest.
What is the reason for imputed interest?
Imputed interest is used when the rate associated with a debt varies markedly from the market rate. It is also used by the IRS to collect taxes on debt securities that pay minimal or no interest.
How is imputed interest calculated?
It is calculated as the yield to maturity (YTM) multiplied by the present value of the bond. The value of the bond at any point in time depends on the amount of time left until maturity, calculated as the starting value of the loan plus accrued interest.
What does it mean to impute interest?
Imputed interest is the interest that is estimated to be collected by the lender, regardless of what the lender actually receives. Tax collection agencies use imputed interest to collect tax revenue on below-market loans and zero-coupon bonds.
How do you record imputed interest?
You book the face value of the loan in the liability account notes payable, but you must also record a debit in an asset account with a name such as cash value of below-market debt. Figure the value of the imputed interest by subtracting the net present value of the loan from the net present value of an identical ...
What are the imputed interest rules?
The imputed interest rules reclassify as interest amounts which are otherwise designated in transactional documents as principal. Where interest is imputed in a business transaction, both the lender and the borrower face differing tax treatment than the transaction documents otherwise call for.
WHO recognizes imputed interest?
The IRS does recognize imputed interest rule exceptions, including gift loans of less than $10,000 (as long as the loan isn't used to buy assets that produce income). This prevents people from, for example, taking a loan and drawing interest on it from a bank.
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