I am 78, married, wife over 65, living on social security, with $150 extra income monthly. As a result f lnding a friend most of our savings a few years ago, I am about to receive a nice sum in return. How can I legally avoid all taxes possible on this payback? -- F. C.
Since you had already paid the taxes on the savings you lent your friend, the return of those dollars does not generate a requirement to pay taxes on those same dollars again. A return of capital is not taxed. However, all interest paid, if any, is subject to tax. You simply add the interest to your other taxable income ($150 a month) and figure the taxes due. your social security benefits are not taxes.
If the interest is a large sum, you could reduce the taxes and possibly avoid them entirely by stretching out the interest payments over several years -- depending on the total iterest and your other income. If your combined income was less than $7,400 for the 1979 tax year, you would not have had to file a return or pay tax. Thus, you could have taken $5,600 in interest on the loan during last year without paying tax. The numbers will likely change for 1980. Still, you might prefer to take the full payment and pay any taxes due rather than wait out future payments.