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The Internal Revenue Service (IRS) has released the Applicable Federal Rates (AFRs) for June 2025, as detailed in Revenue Ruling 2025-12.
These rates are pivotal for various federal income tax purposes, including determining the minimum interest rates for private loans, calculating original issue discounts, and valuing certain annuities and trusts.I
Understanding Applicable Federal Rates (AFRs)
Applicable Federal Rates (AFRs) are the minimum interest rates set by the IRS for private loans to avoid tax complications. They are categorized based on the loan term:
- Short-term AFR: For loans with a term of 3 years or less.
- Mid-term AFR: For loans with a term between 3 and 9 years.
- Long-term AFR: For loans with a term longer than 9 years.
These rates are updated monthly and are crucial for ensuring compliance with tax regulations.
Applicable Federal Rates Rates for June 2025
The following table presents the AFRs for June 2025 across different compounding periods:
| Term | Annual | Semiannual | Quarterly | Monthly |
|---|---|---|---|---|
| Short-term AFR | 4.00% | 3.96% | 3.94% | 3.93% |
| Mid-term AFR | 4.07% | 4.03% | 4.01% | 4.00% |
| Long-term AFR | 4.77% | 4.71% | 4.68% | 4.66% |
These rates are essential for determining the appropriate interest rates on loans to avoid imputed interest issues.
Adjusted Applicable Federal Rates and Section 7520 Rate
In addition to the standard AFRs, the IRS provides Adjusted AFRs for specific tax calculations:
| Term | Adjusted AFR (Annual) |
|---|---|
| Short-term | 3.03% |
| Mid-term | 3.08% |
| Long-term | 3.61% |
The Section 7520 rate for June 2025 is 5.00%. This rate is used to value annuities, interests for life or terms of years, and remainder or reversionary interests for estate and gift tax purposes.
Implications of June 2025 AFRs
The Applicable Federal Rates for June 2025 reflect a stable interest rate environment. Taxpayers engaging in intra-family loans, installment sales, or planning charitable trusts should consider these rates to ensure compliance and optimize tax outcomes.
Staying informed about the latest Applicable Federal Rates (AFRs) is crucial for effective tax planning and compliance.
The June 2025 rates provide a benchmark for various financial transactions, ensuring that taxpayers can make informed decisions and avoid potential tax pitfalls.
FAQs
Why are AFRs important for private loans?
AFRs set the minimum interest rates for private loans to prevent the IRS from imputing additional interest income, which could lead to unexpected tax liabilities.
How does the Section 7520 rate affect estate planning?
The Section 7520 rate is used to calculate the present value of future interests in trusts and annuities, impacting estate and gift tax calculations.
Can I use a rate lower than the AFR for a loan?
Using a rate lower than the AFR can result in the IRS imputing interest, leading to potential tax consequences for both the lender and borrower.