How Do Personal Loans Affect My Taxes?
Summary
Wondering whether your personal loan interest is tax deductible? You're not alone. Here’s a quick guide to how taxes are affected by personal loans.
In this article:
If you have a personal loan or are considering getting one, you might have questions about how getting a personal loan may affect your taxes. After all, other loans like mortgages, business loans and student loans can have an impact come tax time. What are the tax implications of a personal loan? Will you need to pay taxes on the money you borrow?
Let’s take a look at some basic information to help you get a better understanding of how personal loans affect your taxes.
Remember that taxes can often be complex. This article is not meant to be personal tax advice. Please consult your tax advisor for guidance.
Are personal loans taxable income?
Personal loans generally aren’t considered income since they need to be repaid.1 However, when the lender cancels or forgives a personal loan, the amount of the unpaid debt may be taxable income for the borrower, depending on their tax filing status.
Do you need to pay taxes on forgiven personal loans?
If a personal loan isn’t repaid and the lender forgives any amount of the loan balance, this may create what’s called cancellation of debt (COD) income. A COD occurs when a lender and borrower agree to settle a debt for less than what the borrower owes. Any amount forgiven may be considered income and may be taxed.2
If your cancelled debt on a certain loan (or loans) was at least $600 in a given tax year, you may receive a Form 1099-C listing the amount that was reported to the IRS as forgiven debt.3 For example, if you owed $12,000 on a loan and negotiated a cash settlement of $9,000, the remaining $3,000 forgiven by the lender may be considered taxable income reported on Form 1099-C.
When is personal loan interest tax deductible?
Generally, personal loan interest isn’t tax deductible if you use the loan for personal expenses,4 such as home improvements or debt consolidation.
There are a few rare scenarios where you may be able to deduct some or all of the personal loan interest you’ve paid.
Contacting a tax professional may be a smart move if any of the following situations apply to you.
Taxable investments
If your loan agreement allows you to use loan funds to buy taxable investments, such as certain stocks or bonds, you may be able to deduct the loan interest. However you can't deduct interest if you use the loan to buy investments that are already tax-free, such as tax-exempt bonds.5
Business expenses
If your loan agreement allows you to use funds from a personal loan for business expenses, you may be able to deduct the interest you paid on those funds.6
For instance, if you use 80% of a personal loan for personal expenses — like a home plumbing repair — and the remaining 20% for business purposes, you may be able to deduct 20% of the interest paid as a business expense.
Educational expenses
If your loan agreement allows you to use a personal loan solely to pay for school costs (such as tuition, fees or refinancing student loans), the IRS may treat it like a student loan. In this case, you might be able to deduct some of the interest you pay, depending on your income.7
It’s important to note that many lenders, including OneMain, don’t allow you to use a personal loan to buy investments or pay for business or postsecondary school expenses. If your lender finds out, you could have to repay the loan right away or even face legal consequences.8
Go from borrowing to filing with no surprises
Understanding how personal loans may affect your taxes will make you more confident when tax season rolls around. And, if you can, file your taxes early to reduce stress and potentially get any refund you’re owed sooner.
Sources
1, 2 https://www.irs.gov/taxtopics/tc432
3 https://apps.irs.gov/app/vita/content/36/36_03_065.jsp
4 https://www.irs.gov/taxtopics/tc505
5 https://www.experian.com/blogs/ask-experian/do-you-have-to-pay-income-taxes-on-personal-loans/
6 https://www.bankrate.com/loans/personal-loans/are-personal-loans-taxable/#deductions
7 https://www.nerdwallet.com/personal-loans/learn/how-do-personal-loans-impact-taxes
8 https://www.experian.com/blogs/ask-experian/what-happens-if-you-lie-on-loan-application/
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
