Emotions vs. Common Sense
Helping family is one of the core values in Polish culture. But money can complicate even the closest relationships. Unspoken expectations, misunderstandings about repayment dates or a lack of formalities can lead to lasting conflicts.
That is why the key question is: are you prepared for the possibility that you may never get the borrowed money back? If the answer is “no,” it is worth considering other forms of help – for example, a smaller one-time gift or in-kind support.
A Loan with Interest
For years, tax rules have required that loans to family members over $10,000 carry interest no lower than the so-called Applicable Federal Rate (AFR). The IRS publishes the AFR every month online: https://www.irs.gov/applicable-federal-rates. The lender should report the interest received on his or her tax return and pay the income tax due.
If the loan carries interest lower than the AFR, the IRS treats the interest we gave up as a gift. For example, we lend our son $100,000 at 1%, and the current minimum rate is, say, 4.6%. The 3.6% a year, that is, $3,600 (3.6% of 100,000), may be subject to gift tax (read on).
Loan or Gift – Legal and Tax Differences
If you decide on a loan, you need to be aware that under US law, any interest-free loan or loan with too low an interest rate may be treated by the IRS as a gift. For the IRS to recognize a loan between individuals as a genuine loan, it should be documented – it should have a specified interest rate, a repayment schedule and a signed agreement.
If you lend your sister $20,000 without interest, the IRS may consider that you “gave” her the equivalent of the interest due – and this may mean you have to report a gift and possibly pay gift tax. In 2025 and 2026 you can give each person up to $19,000 a year without having to report it to the IRS. If you give more, you must file IRS Form 709 (separately, by the deadline for filing your annual tax return) and subtract the excess from your lifetime exemption, which as of January 1, 2026 is $15 million. In other words, don’t worry about gift taxes unless you are a multimillionaire.
An Agreement Doesn’t Mean a Lack of Trust
The best proof for the IRS that it is a loan and not a gift is a written and signed loan agreement. Preparing a loan agreement does not mean a lack of trust – quite the opposite, it is a sign of respect for the other person and a desire to avoid misunderstandings. The agreement should include: the full names of both parties, the loan amount, the interest rate (at least the minimum required by the IRS), the repayment schedule, the form of repayment (transfer, cash, check), the final repayment date, and a provision on the consequences of not repaying the loan.
You can draw up the agreement yourself, use templates found online or use the services of a lawyer. For larger amounts, it is also worth having it notarized.
When Does a Loan Make Sense?
Consider the borrower’s situation and what plan he or she has for repaying the debt. If someone has lost a job but is highly qualified and actively looking for work, a loan may be a sensible solution. However, if your loved one has a history of mismanaging money and shows no initiative to improve, help in the form of a loan may only deepen his or her problems – and create yours.
A loan can be a good solution when a loved one needs, for example, a down payment to buy a home or financing for education – that is, investments that increase his or her earning potential in the future.
The Emotional Cost of Default
One of the biggest risks of family loans is not losing the money – it is destroying the relationship. If your brother is unable to pay the money back, will you still stay on warm terms? Will you hold a grudge? Will family holidays together stop being a pleasure?
For this reason, many financial advisors recommend following a simple rule: lend only as much as you are prepared to lose without regret. If the amount your loved one is asking for exceeds your comfort zone – say “no” or offer smaller help.
The Alternative: Give, but Wisely
Instead of making a loan, it is sometimes better to simply give your loved one a gift. It is simpler from a tax standpoint (as long as you stay within the annual limits), less emotionally stressful and does not require settling accounts in the future. You can also set your own conditions – for example, “I’ll help you with the rent this month, but I ask that you seek help from a financial counselor.”
If you have larger assets and want to support your family regularly, it is worth talking to a tax advisor about strategies for transferring wealth tax-free over the long term or about putting money into profitable joint investments.
When to Say “No”?
Not every request for a loan has to end with your help. Ask yourself: Has this person asked you for help before? Do you feel he or she treats you like a bank? Don’t you currently have obligations of your own that are a priority for you (for example, a mortgage, your children’s education, retirement savings)?
Saying no can also be a form of caring. Sometimes making someone solve their financial problems on their own is more helpful than yet another financial lifeline.
Summary
Lending money to family is not only an act of trust, but also a financial and emotional decision. It is worth thinking carefully about whether you treat such help as a loan with specific terms or as a gift that does not have to be repaid. Set the rules, put the agreement in writing, be aware of the tax consequences and, above all, protect your family relationships from conflicts over money.
Don’t be afraid to say “no” – sometimes it is the most sensible and most honest answer.
Updated October 2026.
