1. Watch out for the gift tax
For 2023, the Internal Revenue Service has set the annual gift tax exclusion limit to $17,000. This means if you give someone a gift valued at over $17,000, you’ll have to file a gift tax return with the IRS.
However, that doesn’t necessarily mean you’ll face a hefty tax for a one-time gift. The excess of your contribution is subtracted from your lifetime gift tax exclusion — which is currently $12.92 million. Once your lifetime exclusion is depleted, you may start owing gift taxes, which can range between 18% to 40%.
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2. Cosigning comes with caveats
Even if you’re just cosigning a loan to help out a friend or family member with limited credit, it’s important to be cautious.
You could be held liable for any missed or late payments, which can hurt your credit score, or even get you sued or have your wages garnished if the account goes into default.
3. Lending money is risky
If you’re lending a loved one funds with the expectation you’re going to be paid back at a later date, there can be several pitfalls to look out for.
Aside from making sure you don’t loan out more than you can afford, you’ll need to decide on a repayment schedule and whether they’re going to owe you interest as well. Experts advise you to put all of this in writing.
And you’re not always guaranteed to get your money back — which could potentially harm both your relationship and your finances.
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