A 75-year-old man living in a semi-expensive assisted living facility was supposed to receive an inheritance of almost $146,000 when the siblings decided to sell their late mother's home for $600,000 last year. However, he was shocked to find that the mother, in her will, had deducted $20,000 from his payout for a loan he had taken from her in 1996. The man could only repay $5,000 towards the interest-free loan he took to buy a condo. While the initial plan was to repay in whole within two years, he lost his high-paying job, and a string of poor financial decisions made further repayments impossible. The mother didn't take it well. Non-repayment led her to create a will highlighting his son's defaults, supported by a 1996 letter stating he didn't repay the loan. It is the only evidence present. He was shunned by her sister, mother's power of attorney, who stopped talking with him after learning about the financial mess. While the man is upset about the situation, he supposedly needs every cent of his inheritance, mainly because he isn't in good health, and Medicare partly covers his medical bills.
Plans To Amend Mother's Old Tax Returns
Given that a decades-old letter of non-repayment was the only evidence in the will, the man was exploring ways to get the entire inheritance payout and prove that he had repaid $5,000. He is mulling redoing tax returns, but his mother lent money three decades ago and didn't record it on her tax return, which will most likely be treated as a gift by the Internal Revenue Service. According to leading credit bureau Experian: "When someone lends you money and doesn't charge you interest, or charges a below-market rate compared to the IRS's current applicable federal rate, the IRS might consider the loan a gift or require them to pay income taxes on imputed interest." The gift tax exclusion limit was $10,000 per year in 1996, almost double the loan money, but her passing away last year makes it more complicated to restore the entire $146,000 in inheritance.
If the $20,000 were classified as an official loan, the IRS would have required a bad debt statement with details from his mother before she could deduct the unpaid debt from her annual taxable income. Tax services provider TurboTax notes that one should "deduct a bad debt in the same year it becomes worthless." Unpaid debt you could have reported and taken a deduction for years ago could be claimed within three years by modifying the return. Despite that, it wouldn't have been easy for her to deduct the bad debt from his son's unpaid loan on her return. TurboTax explained that the unpaid debt is a short-term capital loss, which you must adjust against any short-term capital gains before "deducting it from long-term capital gains." However, it's possible to deduct $3,000 of any remaining balance from other income, but these options aren't viable anymore. Overall, the will states that she reduced her son's inheritance pay by $20,000 to adjust for the unpaid debt, which supersedes any provision to avoid the pay cut by modifying tax returns.
Who Is At Fault?
It isn't impossible to repay the outstanding $15,000 over 28 years with no interest accrual. The man could have repaid the whole amount before his mother passed away if he had sent her $50 monthly over the same duration. Hence, he could have better prioritised his loan repayment duties. Moreover, the family will likely see him as a sibling who didn't repay their mother. The sister's anger could also be due to the timing of the situation. She could be more annoyed because recording that $5,000 he repaid with the IRS could mean more paperwork for her. Trying to get away with debt and making way for potential family drama not long after their mother passed away are also factors possibly putting the man in a poor light.
