Hello,

I'll be lending money to family/friend and I'm not sure if the money that will get on interest will be taxed. Also does it make a difference in taxes if the interest is 1%, 5% or 10%?

You are supposed to declare the interest as income, and he can deduct the interest as expense.
What is the amount of the principal being loaned, and for how long, and is it family or friend? The IRS has a minimum rate for family loans that varies monthly and depends on the term.
Are you two clear on the arrangement about declaring/deduction interest?

THEY will not get interest. Interest is paid to the lender not the borrower. And yes, you will need to declare the interest as income.

No it doesn't matter what interest rate you charge. But the amount of taxes will differ on the amount of income.

Actually, when you lend money to family, the rate DOES matter, because the IRS expects you to charge the same rate you would charge a perfect stranger. If you do not, and the IRS finds out about it, the IRS could "impute" (which means add on) the extra market rate interest as income on your tax return.

I started to mention that but wasn't sure it was on all family loans. On the other hand, market rates are very low now, the IRS can tell you what you should charge.

Be sure to draw up a written loan agreement that specifies the rate of interest and the terms for repayment (monthly, quraterly, annual payments?), including the date when final payment is due. Otherwise the loan may be considered a gift rather than a loan.

Just to to correct joypulv's comment - the friend can not deduct the interest paid. The only interest payments that are deductible are mortgages and certain home equity loans, and the OP makes no mention of this being a mortgage loan.

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It could possibly fall in the investment interest category, but that is not mentioned either.

It could possibly fall in the investment interest category, but that is not mentioned either.

Yes, that's true, thanks for catching that. I guess I should have stated that it's not deductible if it's a personal loan that is not qualified home mortgage interest, which is what I assumed.