When we sold our late mother’s house last year for $600,000, the estate should have been divided equally between us four siblings (about $146,000 each). In 1996, I borrowed $20,000 interest-free from my mother to help me purchase my apartment. I promised to pay it back within two years.
I was able to pay her $5,000 back in six months. But I made terrible financial decisions and lost my high-paying job. My budget couldn’t afford to pay it off. I was terrified to tell him. She was extremely angry at the time, so she deducted $20,000 from my inheritance.
Long story short: I defaulted on Mom’s loan. When Mom made her will, she showed me my letter from 1996, which stated that I had not repaid the loan. This is the only proof of the transaction. I want the CPA to redo my taxes to show that I paid off part of the loan.
When I called my sister, mom’s attorney, she was so angry. She said, “F— you, don’t ever talk to me again!” I was shocked! She has never spoken to me like that in 75 years. I understand her anger because she is a mess and she is a hero for doing such a wonderful job as a prosecutor.
I’m angry too, but I need every penny of my inheritance. I live in a semi-expensive assisted living facility and am not in good health. Additionally, Medicare only pays a portion of my healthcare bills. Do you have any suggestions on how to resolve this mess, without having to redo your taxes for 2022?
Son short of money
Related: “Our American Dream Turned into a Nightmare”: I sold my house, but rising interest rates and prices put me out of the market. What can I do?
“Your mother loaned you this money nearly 30 years ago, but did not report it on her tax return, and as such it is most likely considered a gift by the Internal Revenue Service.”
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Dear short of money,
You are digging a dry well.
I’m sorry you lost your job during your peak earning years. But given the timing involved, it’s hard to accept that you couldn’t have repaid your mother $15,000 in 28 years. It’s time to get real and own your part in this family drama. This loan should have been a priority for your budget. If you had given your mother $50 a month for that period, the loan would have been paid before she died.
Your mother loaned you this money almost 30 years ago, but did not record it on her tax return, and as such it is most likely considered a gift by the Internal Revenue Service. In 1996, the annual gift tax exclusion was $10,000, so your mother effectively gifted you double the eligible amount. Since your mother passed away last year, it seems like the ship has sailed.
If you want to amend your mother’s 2022 tax return, it’s years too late. And if you think that amending your mother’s return will restore your entire inheritance of $146,000, you are sadly wrong. It appears that she left a will in which she states that she wants to deduct $20,000 from your inheritance. You can’t undo it by editing yours OR your mother’s tax return.
Gift against personal loan
From what you write in your letter, it appears that your mother actually gave you this money, at least in the eyes of the IRS. “When someone lends you money and doesn’t charge you interest, or charges a below-market rate than the IRS’s current applicable federal rate, the IRS may treat the loan as a gift or require them to pay income taxes on the imputed interest,” EXPGY,
He says.
If this era For an official loan, however, the IRS requires a bad debt statement, which explains the details. “You have to deduct a bad debt in the year it becomes worthless. If you realize that you could have reported and taken a deduction for an unpaid debt years ago but didn’t, you generally have only three years to amend your return to claim it on your tax return,” according to TurboTax INTU,
Even in that situation, your mother probably wouldn’t have been able to deduct a bad debt from your unpaid loan. “It’s a short-term capital loss, so you must first deduct it from any short-term capital gains you have before deducting it from long-term capital gains,” TurboTax adds. “You can deduct up to $3,000 of any remaining balance against other income.” But that’s all water under the bridge now.
A decade-long drama
Rather than think about what You they are due, look at it from your family’s point of view. You’re the one who defaulted on a loan and a promise. That $20,000 would equate to nearly $30,000 in purchasing power in 2024 — and that doesn’t take into account the equity your mother “invested” in your home, which likely appreciated by the time you sold it. No one hurt you: not your sister nor your mother.
Maybe your sister is frustrated that years after this loan went unpaid, you are trying to get her more work by recording this $5,000. This amount is a small sum in the larger scheme of your inheritance. Your mother helped you financially when you were buying your apartment. Don’t turn this good deed into a three-decade-long drama. You know that you have paid off part of the loan. It does not need to be registered with the IRS.
Your sister is probably less annoyed that you haven’t repaid the remainder of the $20,000 loan, and more frustrated that you’re trying to turn a bad debt dating back to 1996 into a payday following your mother’s death. It’s hard to explain that it’s not fair that you lost $5,000 in your mother’s will when you failed to repay $15,000.
Focus on what you have in your life and make amends with your sister.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com and follow Quentin Fottrell on X, the platform formerly known as Twitter.
The Moneyist regrets that it cannot answer questions individually.
Previous articles by Quentin Fottrell:
“I don’t want my wife to lose everything”: I was diagnosed with dementia – suddenly I couldn’t write legibly
‘Things haven’t been easy’: My sister is a hoarder and procrastinator. You are delaying the succession of our parents’ estate. What can I do?
“I Gave Up a Job I Loved Passionately”: My husband secretly created a trust that includes our home and his investments. What should I do?
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