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I'm no tax authority, but I would say that your "gift" would be just that, a separate transaction, meaning...

a. your son can deduct the loan interest paid to you.
b. the interest paid to you is interest income, reportable and taxable
c. your gift to your son is a separate transaction, and as it is within the gifting limits, it has no tax consequence. However does not relieve you of the tax due on the interest you received.

Gifting your son has no impact on the tax you owe, or that he might deduct.

If you want to help your son out while coming out even, you could gift him an amount equal to the interest you received, less the tax you paid. For example, you paid $100 on the $1000 of interest received, you would then gift your son $900. That gift would not affect his ability to deduct his loan interest.

Hope that helps.
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