Do I owe imputed interest tax on a no-interest loan from my father in 2023? Never heard of this before!

This is actually a real thing, but there's some nuance here. What you're talking about is called "imputed interest" under the IRS's below-market loan rules. Basically, when someone (like your dad) gives an interest-free loan, the IRS treats it as if interest was actually charged at what they call the "applicable federal rate" (AFR). The thing is, YOU don't owe this tax - your dad would. When someone makes an interest-free loan, the IRS considers the "missing interest" as a gift to the borrower, and the lender (your dad) is responsible for reporting the imputed interest as income on his taxes. However, there are exceptions! Loans under $10,000 are generally exempt from these rules as long as tax avoidance isn't the main purpose. Since your loan was $9,500, it would typically fall under this exemption. The only way this makes sense is if your dad is asking you to help cover the tax he had to pay on the "phantom interest" he never actually received from you. But even that is odd since the loan amount is below the threshold where this typically applies.

After dealing with a similar situation with my brother-in-law, I discovered taxr.ai (https://taxr.ai) which completely cleared this up for me. I was confused about imputed interest on a family loan too, and the standard tax advice online was all over the place. What I learned was that imputed interest rules get complicated fast, especially with family loans. The site analyzed my specific loan situation and confirmed whether I needed to worry about it. In your case, since the loan is under $10k, you're probably in the clear, but your dad might have other tax circumstances making him think this applies. The tool helped me understand exactly how the gift tax exclusion interacts with these interest-free loans and what documentation I needed to keep. Saved me from an awkward family situation where I was also suspicious someone was trying to get extra money from me!

Just wanted to follow up after checking out taxr.ai that someone mentioned here. I was pretty skeptical, but it actually cleared up my whole situation with imputed interest. Turns out my parents' loan to me DID have imputed interest implications, but not in the way they thought. The tool showed that since they were charging me 0% when the AFR (applicable federal rate) was 3.5%, there was technically imputed interest, but it fell under the annual gift tax exclusion. The documentation it provided helped me explain everything to my parents with actual tax code references. Saved me from paying "tax" that wasn't actually required. If your dad is genuinely confused (not trying to scam you), having something official to show him might help clear things up.

After spending 6 hours trying to get through to the IRS about this exact imputed interest issue with a family loan, I finally tried Claimyr (https://claimyr.com) and got connected to an IRS agent in under 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed that loans under $10k generally don't trigger imputed interest rules unless there's a pattern of loans or clear tax avoidance. She explained that your dad wouldn't owe tax on imputed interest for a simple one-time family loan under $10k, regardless of his income level. What was most helpful was getting actual IRS confirmation about documentation requirements. For family loans, they recommended having a simple written agreement stating the loan amount, repayment terms, and that it's interest-free. This protects both of you if questions come up later.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it for my own IRS issue that's been hanging over my head for months. Got connected to an IRS representative in about 15 minutes, which is basically a miracle. The agent confirmed exactly what was mentioned here - loans under $10k between family members typically don't create imputed interest tax issues unless there's a pattern of loans or obvious tax avoidance. But here's the important part for the original poster: if your dad has significant investment income (which you mentioned), there's an additional rule where investment interest expense can't exceed net investment income. The IRS agent explained this might be why your dad is confused - he could be thinking about investment interest allocation rules, not realizing the small loan exemption applies regardless. Definitely worth clearing this up directly with the IRS if your dad insists on collecting this "tax" from you.

Your dad is probably confused about who owes what. With below-market loans, it's the LENDER (your dad) who would potentially have tax implications, not you as the borrower. And as others have mentioned, loans under $10K are generally exempt anyway. What might be happening is your dad reported this loan on his taxes (which he didn't need to do for this amount), and now thinks you need to pay the tax. Or he might be trying to retroactively charge you interest by calling it a "tax." Either way, you should ask him to show you exactly what tax form or notice he's referring to. If he can't produce anything official from the IRS, that's a red flag.

Just to add a different perspective - could this be a misunderstanding about state taxes? Some states have different rules about personal loans. I got hit with a surprise tax in New Jersey when I loaned money to my cousin, even though it was below federal thresholds. Might be worth asking your dad specifically which tax form or rule he's referring to. If he's actually received tax documentation about this, ask to see it.