Or what man is there of you, whom if his son ask bread, will he give him a stone?
Or if he ask a fish, will he give him a serpent?
If ye then, being evil, know how to give good gifts unto your children, how much more shall your Father which is in heaven give good things to them that ask him?
If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
Generations from all cultures have recognized the virtue of giving gifts. Sometimes the gift takes the form of an interest-free loan. It's a good way for parents to help their children start out while still instilling a sense of responsibility and gratitude. But if that loan is more than $10,000, beware. The federal government will tax the person giving the loan for the interest he could have gotten had he made the loan on the open market. 26 U.S.C. § 7872.
There is something called the "applicable federal rate." If you make a loan with interest below that amount, the government wants you to pay income tax on the difference between the magical federal rate and what you charged.
So, for instance, if you made a no-interest loan of $40,000 to a child to help him make a down payment on a house, the government imputes interest income to you. The October 2006 federal applicable rate was around 5%. Presto, even though you haven't gotten any income from the loan, you will be taxed as if you had received $2,000. (There are convoluted adjustments possible, but this is the general idea).
Even though there is a gift tax exemption for certain amounts, it is only by the grace of Congress. In the meantime, remember that even if you don't want to charge usury to your family or friends, the watchful grace-enforcers will tax you as if you did.
There is another nifty little feature in tax law. If you let your adult children (or anyone else) use property you own, perhaps a cabin by the lake or an extra house to live in (or, conceivably, even a car or boat), the IRS can impute rental income to you. This is decidedly not Calvin's doctrine of imputation. But that is another story for a different time.