Loans are not income, because you have to pay them back. It doesn't matter whether you borrow from your parents, a relative overseas or a bank, and it doesn't matter how much you borrow: You don't have to pay income tax on loans. If you don't pay the loan back, that's another story.
If you borrow, say, $10,000 from a foreign uncle, you don't report it on Form 1040. If you run into trouble, can't repay the loan and your uncle says to just forget it, then the Internal Revenue Service may be interested. In the eyes of the tax man, the $10,000 you originally received is now income, as you're never paying it back. Banks that forgive a loan send out a form -- 1099-C -- for canceled debt, but individuals don't have to send you one. That doesn't make it any less income.
Gift of Forgiveness
Family members have an option that banks and credit-card companies don't. Banks have to treat debt forgiveness as the writing off of a bad debt, but relatives and friends can make forgiving your loan a gift. Gifts are never taxable income, so you're off the hook with the IRS. This includes debt cancellation written in your relative's will to take place after she dies. If your relative is subject to American taxes, he may have to report the gift and deal with gift taxes, but you don't.
Gifts From Foreigners
If your relative isn't a U.S. citizen, you may still have some paperwork to deal with. The IRS requires you report gifts from foreign individuals if the gift is greater than $100,000. If your foreign grandfather, say, forgives a loan that big, it qualifies. If you receive several gifts from one person that add up to $100,000 or gifts from two affiliated people -- your grandfather and grandmother, say -- you report the total, You file IRS Form 3250, which you send in separately from your main tax return.
Loans and Gifts
If your relative is subject to the IRS -- a resident alien, for instance -- it may be smart to treat the loan as a business transaction. The IRS suspects loans between family members are a way to duck the gift tax, so it scrutinizes them carefully. If your relative can show a promissory note that proves it's a real loan, with market rates of interest, he's on safe ground. Otherwise, the IRS may require he pay gift tax on the money.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.