Do I need to report interest from a family loan on my taxes? How to document family member interest payments?

Yes, interest income from personal loans (including family loans) is taxable and needs to be reported on your tax return. The IRS considers any interest you receive as income regardless of the source. For reporting purposes, you would include this interest on Schedule B (Interest and Ordinary Dividends) of your Form 1040, even without receiving a 1099-INT. You simply list "Personal Loan to [Sister's Name]" as the payer and report the amount of interest received during the tax year. I strongly recommend creating a formal loan document (promissory note) that both of you sign. This should outline the loan amount, interest rate, payment schedule, and terms. Having this documentation serves two purposes: it helps prove to the IRS this is a legitimate loan if you're ever questioned, and it provides clear expectations for both parties. You should keep detailed records of all payments received, separating the principal repayment (not taxable) from the interest (taxable). A simple spreadsheet works well for this tracking.

After dealing with a similar situation lending money to my cousin, I found an amazing tool that made tracking and reporting the loan interest super easy. I used https://taxr.ai to create proper loan documentation and calculate the exact interest income I needed to report. They have a loan tracking feature that splits each payment into principal and interest automatically. The best part was that it showed me how to properly document everything for tax purposes and even generated a year-end statement I could use for my tax filing. It saved me so much confusion when tax time came around! They also have specific guidance for family loans and the Applicable Federal Rate requirements another commenter mentioned.

Just wanted to follow up about my experience with the family loan documentation. I ended up using https://taxr.ai for the loan to my son, and it was incredibly helpful! The promissory note they generated looked really professional, and my son actually took the whole thing more seriously when he saw the formal paperwork. The interest tracking feature automatically calculated how much interest I earned each month and will summarize it for tax season. I already set a reminder in my calendar to print out the year-end statement they provide when it's time to do my taxes. Their guidance on the Applicable Federal Rate was spot on too - they had the current rates right in the system. For anyone doing family loans, having proper documentation like this makes the whole process much more straightforward!

If you're having trouble reaching the IRS to ask about family loan interest reporting, I highly recommend using https://claimyr.com to get through to an actual IRS agent. I was on hold for HOURS trying to get specific answers about loan documentation requirements, then I found this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c Basically, they hold your place in the IRS phone queue and call you when an agent picks up. I was able to speak directly with someone who confirmed exactly what I needed to report and how to document my family loan. They saved me literally hours of waiting on hold, and I got clear answers straight from the IRS about my specific situation.

I owe everyone an apology - especially to Profile 3. I was completely wrong about Claimyr being a scam. After dismissing it initially, I was so frustrated spending an entire afternoon on hold with the IRS last week that I decided to try it. The service works exactly as described. They just waited in the phone queue for me (took over 3 hours!) and called me when an IRS agent picked up. It was the same wait time I would have had anyway, but I got to do other things instead of sitting by my phone the whole time. The IRS agent I spoke with gave me great info about family loan documentation and confirmed that yes, you absolutely need to report interest from family loans on Schedule B. They also mentioned keeping copies of the loan agreement and payment records for at least 3 years after the loan is fully paid off, just in case of questions later.

One thing nobody's mentioned yet is the potential gift tax implication. If you're lending more than $17,000 (the annual gift exclusion for 2023), you should definitely document it as a real loan with interest at or above the Applicable Federal Rate. Otherwise, the IRS might consider it a gift subject to gift tax rules. You probably won't actually owe gift tax (since most people don't exceed the lifetime exemption), but you might need to file a gift tax return (Form 709). Also, don't forget that if your sibling defaults on the loan and doesn't pay you back, you may be able to claim a non-business bad debt deduction, but you'll need good documentation showing it was a legitimate loan and not a gift.

Has anyone used TurboTax to report this kind of family loan interest? I'm wondering if it has a specific section for this or if you just enter it as "other interest income" somewhere?

I went through this exact situation last year when I loaned my brother money for his business. One thing I learned that might help others is to set up a simple amortization schedule at the beginning - it makes tracking so much easier throughout the year. You can create one in Excel or Google Sheets that shows each payment broken down into principal and interest portions. This way, you know exactly how much taxable interest income you'll receive each month, and your sister will know exactly how much she owes. Also, make sure to discuss with your sister upfront how she'll handle the interest payments from her tax perspective. She won't be able to deduct the interest since it's personal (not business or mortgage interest), but it's good for both of you to understand the full tax picture before moving forward. The promissory note is definitely essential - I used a simple template I found online that included all the key elements mentioned by others here. Having that formal document made me feel much more confident about the whole arrangement.

Great question! I went through this exact same process when I loaned money to my daughter for her wedding expenses. You're absolutely right that the interest you receive will be taxable income that needs to be reported on your tax return. From my experience, here are the key steps I recommend: 1. **Create a formal promissory note** - This is crucial for IRS documentation. Include the loan amount, interest rate, payment schedule, and what happens if payments are missed. Both parties should sign and date it. 2. **Track payments meticulously** - Keep detailed records separating principal repayment (not taxable) from interest payments (taxable income). I used a simple spreadsheet to track each monthly payment. 3. **Report on Schedule B** - You'll report the interest income on Schedule B of your Form 1040, even without receiving a 1099-INT. Just list your sister's name as the payer and enter the total interest received during the tax year. 4. **Check the Applicable Federal Rate (AFR)** - Since your loan is over $10,000, make sure your 5% interest rate meets or exceeds the current AFR to avoid potential gift tax complications. The IRS publishes these rates monthly. One additional tip: Consider discussing the tax implications with your sister upfront. While she won't be able to deduct the interest payments (since it's personal debt), it's good for both of you to understand the complete picture before moving forward. Having proper documentation from the start will make tax time much smoother and protect both of you if the IRS ever has questions about the arrangement.