Tax Questions & Tips

How do personal loans affect taxes?

December 1st, 2022 Dec 1, 2022 • Read time: 4 min

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When you’re preparing for tax season, you may have a lot of questions about what is and is not considered taxable income. If you’re not sure about personal loan taxes, you’ve come to the right place. 

So, do personal loans affect taxes? The short answer is “probably not.” If you are paying your personal loans off on time, they are unlikely to impact your taxes. However, there are a few specific situations in which a personal loan may be taxable or may qualify you for a tax deduction. We’ll walk you through all the details.

Are personal loans taxable?

Most of the time, personal loans are not taxable. If you are making regular payments on your loan, it will not be taxed. However, if you have fallen behind on your payments and your loan is canceled, you will need to report it on your taxes.

Is personal loan interest tax-deductible?

Generally, personal loan interest is not tax-deductible. The exceptions are personal loans that have been taken out to cover business expenses, taxable investments, and some higher education costs. 

Let’s take a closer look at each of these personal loan tax deduction situations:

Business Expenses:

Starting up and running a business often requires a significant amount of money. In some cases, you might need to take out a loan to cover expenses. The personal loan does not have to be large in order to qualify as tax deductible. 

For instance, if you take out a $600 loan to fund repairs on your delivery vehicle you may be able to subtract the interest on that $600 from your business’s taxable income for the year. 

If you use a loan for both personal and business expenses, you can only deduct the amount of interest that is associated with the money used for business purposes

So, if your loan was for $600 but you spent $200 on personal items and $400 on your business, you can only deduct the interest on the $400.

Taxable Investments:

Certain stocks, mutual funds and bonds are taxable, but others aren’t. If you use a personal loan to purchase taxable investments, you can deduct the interest from the loan on your taxes. 

Qualifying higher education expenses:

In most cases, people use private student loans or federal loans to pay for higher education expenses. But sometimes, students will use personal loan funds to refinance a student loan or to pay fees associated with attending college. 

If all of the personal loan funds are used to pay for education-related expenses, the interest payments on the loan may be deductible on your taxes. 

Keep in mind, there are specific conditions that have to be met in order to deduct the interest, and it’s best to check with a tax professional about your personal situation. For instance, the loan must be for someone who is enrolled in a recognized program, and they have to be taking at least half of the full-time course load.

Is a personal loan considered income?

No, personal loans are not considered income. While a personal loan is a sum of money that you have received, it is considered debt and not income. You are not making money from your personal loan – it is money that you have borrowed and will be paying back. Because of this, you usually don’t need to report personal loans on your taxes.

What happens if your personal loan is canceled? 

If you get behind on payments on your personal loan, it may get sent to collections and you could default on the loan. If you then file for bankruptcy, you may have part of your loan canceled. When this happens, the lender that gave you the personal loan will send you a Cancellation of Debt form for the amount of debt that has been canceled. This form is also known as a 1099-C and you will need to include it when you submit your tax return. As a result, you will need to report the amount of the loan that is canceled as income – and you will have to pay taxes on it.

For example, say you take out a loan for $500 and you pay back the first $300 of the loan. Then, your financial situation unfortunately changes, and you are no longer able to pay back the other $200 of the loan. If you file for bankruptcy and don’t pay back this $200, the loan will be canceled. You will then have to report this $200 on your taxes as income.

Find a personal loan that works for you

Personal loans can be a great tool for improving day-to-day situations. They often make things like auto repairs and home improvements possible. By being informed on how personal loans work and what personal loan tax implications are, you’ll be able to make the right financial decisions for your unique situation. 
We’re here to help. Learn more about our personal loan offerings — or, for help filing your taxes, click here.

Author – Jamie Lewton

Jamie Lewton is a consumer finance specialist who has built her career with the Sun Loan team. Jamie’s decade plus in the finance sector began with a role as a Consumer Loan Specialist at Sun Loan. ... Read more »

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