Is interest on a loan to my kids taxable? Who reports it on their tax return?

Yes, the interest is definitely taxable - the IRS doesn't let interest income go untaxed regardless of account ownership. The real question is who reports it. Since this is a formal lending arrangement between you and your children, the interest you pay them is income to the person who legally owns the loaned money. Joint accounts complicate things because ownership isn't automatically 50/50 - it's based on who contributed the funds originally. If these were truly your children's funds (like gifts they received, money they earned, etc.), then the interest should be reported on their returns, even if the accounts are joint. However, if you were the source of the original funds in those accounts, then you're essentially paying interest to yourself, which wouldn't be reportable income to anyone. It would be like taking money from your left pocket and putting it in your right pocket.

After struggling with a similar situation with my son's college fund, I found taxr.ai (https://taxr.ai) incredibly helpful for sorting through these family loan arrangements. They analyzed our loan documents and bank statements, then provided clear guidance on who needed to report what. In my case, the interest I was paying my son was definitely reportable on his return, even though we had a joint account. What made the difference was documenting that the money originally belonged to him (from grandparent gifts) before I borrowed it. The taxr.ai system helped me create proper documentation to establish clear ownership, which saved us from potential issues down the road.

Well I need to eat some humble pie here. After my skeptical comment I decided to try taxr.ai myself since I was getting nowhere with my own research on this topic. I'm actually impressed with how thorough their analysis was. My situation was a bit different - I had borrowed from my daughter's trust account that I manage as trustee. They quickly identified that since I'm the trustee but not the beneficial owner, all interest needs to be reported on my daughter's return (or the trust's return depending on distribution terms). They even provided templates for creating a proper promissory note to document the loan terms, which I didn't have before. Definitely worth checking out if you're dealing with intra-family loans.

If you need to get definitive clarification from the IRS on this situation, good luck getting through to them! After being on hold for 3+ hours trying to get an answer on a similar family loan question, I finally discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that for joint accounts, what matters is who was the true economic owner of the funds that were lent. They suggested documenting the entire arrangement carefully with a written loan agreement that clearly states who owns what percentage of the funds. This way, you can properly allocate the interest income to the right person's return.

I have to apologize for my skeptical comment earlier. After tax season started getting crazy and I still couldn't get answers about my business deduction questions, I broke down and tried Claimyr. I'm honestly shocked at how well it worked - I got through to an IRS representative in about 15 minutes when I'd previously wasted hours trying. The agent was able to answer my questions about family loans too (I have a similar situation with my mother) and confirmed that what matters is documenting who truly owns the money being lent, regardless of whose name is on the account. They recommended creating a written agreement specifically stating the ownership percentages of the joint account funds to avoid confusion. Definitely worth using if you need specific answers from the IRS.

Don't forget about Form 1099-INT! If you're paying more than $10 in interest to your kids in a calendar year, you're technically supposed to issue them a 1099-INT form for the interest paid. This applies even if they're your children. Most people skip this for small family loans, but if the amounts are significant, the IRS does expect proper documentation.

Has anyone considered the gift tax implications here? If you're paying your kids above-market interest rates, the excess interest could potentially be considered a gift from you to them. My accountant flagged this for me in a similar situation.

This is a great discussion! One thing I'd add is to make sure you're documenting everything properly from the start. I learned this the hard way when my daughter borrowed money from me (opposite situation, but same principle). Keep records of: - The original source of funds in those joint accounts (was it allowance money, gift money from grandparents, etc.?) - A written loan agreement with clear terms, even if informal - Payment records showing principal vs. interest breakdown - Bank statements showing the transfers The IRS really cares about substance over form here. If your kids truly owned that money originally and you're paying them legitimate interest, then yes, it's taxable income to them. But if you were just moving your own money around between accounts, that's different. The key is being able to prove the economic reality of who owned what. Also worth noting - if your kids are minors and this pushes their income over the filing thresholds mentioned earlier, you might want to consider whether the tax complications are worth it compared to just keeping it as a family arrangement without formal interest payments.