Wife and I are considering lending money to some of her relatives in Japan, and I’m looking to minimize/zero any tax liability for it, and any hassle/risk associated with an international financial transaction.
For the American aspect of it, do I need to talk to a tax attorney, or a CPA?
Similarly, what sort of consultant would I look for in Japan to assure we do things right on the Japanese end?
In matters of law, you want an attorney.
In matters of accounting, you want a CPA.
One thing to consider is if you are going to loan them USD or JPY. They will probably want to pay you back in JPY since it is presumably the currency they earn, but then you are taking the risk of the exchange rate moving against you (or for you).
You probably want a tax attorney first, since your initial concern is the structure of the transfer. The attorney will refer you to a CPA if necessary to deal with reporting it.
That is incredibly unhelpful.
Are they gonna pay you back with interest?
Since the OP is looking for financial and legal advice, let’s move this to IMHO.
Colibri
General Questions Moderator
Since the OP is looking for financial and legal advice, let’s move this to IMHO.
Colibri
General Questions Moderator
Polonius had it right; and if relatives are involved, it’s even worse. If things go tits up you have a potential family split on your hands.
Probably no interest, unless there’s some compelling tax reason for charging a token interest rate.
We would happily give it as a gift with no expectation of repayment, if the recipient were willing to receive such a gift. But they are not, despite their need; they would only be willing to treat it as a loan.
Then I don’t see any need to consult either a tax lawyer or CPA. You just agree with the recipients on an informal set of terms and wire them the money. Why would there be any tax consequences if there is no interest?
Because it’s still a transfer of funds.
See gift tax:
So an interest-free (or apparently even a low-interest) loan could trigger a tax liability. This is the kind of thing I want to get right, and it’ll be a substantial amount of money, which is why I’m looking for professional advice on how to do it and how to adequately document it - I just wasn’t sure what sort of professional to consult. The fact that it will be an international transaction is an additional complicating factor.
Bear in mind that the gift tax trigger is quite high - $14,000 this year - and it calculated per person on the giver side, to unlimited recipients. That means that a husband and wife can gift up to $28,000 to another individual without tax consequence. You indicate “relatives” plural in the OP, so the two of you can give up to $28,000 to each of the relatives without tax consequence (see para #3 specifically)
Do verify everything I have said and cited with a CPA, though. Internet advice is free and non-taxed, but often worth what you pay.
You want a CPA. Absolutely and without question.
Don’t complicate it more than it has to be.
The answer here is staring you in the face. Tell the recipients that for U.S. tax purposes, the money needs to be given as a gift, with no expectation of repayment. Which is true - there will be tax consequences if it is a loan, and no tax consequences if it is a gift (within gift tax rules).
At a later date, they are free to help you out with funds you need, such as paying for your family to visit them in Japan.
You certainly want a CPA, not a tax attorney.
However, I can attest that it’s extremely difficult to find a moderately-priced US CPA who has any clue about the taxation of transactions involving foreign exchange. For the relevant expertise, you would need to go to a major firm with an international presence, and it will not be cheap.
How large is this? Under the circumstances, the simplest way to structure this would probably be as a gift or a series of gifts across multiple tax years such that the amounts are less than the annual gift tax exemption limits for both the U.S. and Japan. Of course, if there’s any understanding, whether formal or informal, that there is an obligation for your relatives to make a future “return gift”, then this won’t work - clearly that’s effectively a loan rather than a gift.
If you structure it as a loan, then the interest element is straightforward - it’s taxable for you as income. The forex aspect is the tricky part. If the relatives plan to pay you back a fixed dollar amount, then there’s no forex risk or forex tax element for you - but the relatives have forex risk (and tax implications for them in Japan), since the yen amount that they ultimately need to pay back may be larger or smaller. If it’s structured as a loan for a fixed yen amount, then you bear the forex risk and the tax implications for the forex gain or loss on your US tax return are arcane. Your forex gain or loss is generally treated as ordinary gain/loss under US Code Section 988. Even with 500-an-hour CPAs at a major international firm I eventually had to read the entire code myself to correct them and to figure out how to deal with this correctly. Generally it's something only corporations deal with, so it's hard to find a personal CPA who has a clue - but the amounts can be large, it's quite possible that -yen could move 30% over the duration of the loan.
As a footnote - don’t get ripped off by your bank on the foreign exchange (sale of $, purchase of yen). For a large transaction, the most efficient way to buy the yen is through a specialist firm. But make sure it’s a well capitalized reputable specialist firm since you bear credit risk during the transaction. I can recommend WorldFirst, although I don’t know if they handle JPY transactions. Figure out how to monitor the wholesale interbank forex rates as reference point; all retail forex rates are negotiable relative to that.
As a footnote on less technical matters:
As others have said, loaning money to friends and family is generally a terrible idea. I’d say either gift them the money, as you’ve said you are quite willing to do, or avoid this altogether. If they have a “loss of face” problem with accepting a gift, surely an even greater loss of face might be involved if they can’t repay a loan? If the size is such that you can structure it to avoid gift tax, perhaps you could use the arcane tax complications of an international loan as leverage to convince them to just accept it as a gift?
Not sure yet, but likely well over the gift threshold. And the timing may be challenging, possibly as early as next spring. Maybe we could do a gift (<28K) on/before 12/31, and then do another on/after 1/1. If more is necessary, then maybe we could do a small loan after that? Or maybe not. I'm trying to do this all above-board (I don't want any legal grief, considering the amount of involved), and since the recipient would certainly intend to pay it back, for tax purposes the entire amount would very definitely be considered a loan.
The purpose is to secure, in the near future, long-term accommodations for a special-needs adult in the care of an elderly and increasingly frail parent. Said parent is in possession of some real estate that may be difficult to sell quickly, and (probably) some other financial assets that need to be tracked down. It’s complicated, but I believe the ability to eventually repay exists (which is why they might be willing to accept a loan even if they won’t accept a gift).
Anyway, thanks for all the info. I will try to find a CPA (probably two or three to ensure I’m getting consistent info/advice).
Yes, write a simple IOU, and call it a gift* in your head* and if the funds come back great. No tax consequences. Do keep paperwork just in case the IRS asks you about those checks. But no need for any special professional.
So? If you give your kid his $20 allowance* that* is a transfer of funds. Do you consult a professional?