How Do Personal Loans Affect My Taxes?
Summary
Wondering what the tax implications are for taking out a personal loan? Here’s a quick guide to how taxes are affected by personal loans.
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If you have a personal loan, or are considering getting one, you might have questions about your taxes. After all, other loans like mortgages, business loans and student loans can have an impact come tax time. What are the personal loan tax implications, and should you worry?
The short answer is no, personal loans don’t affect the taxes of most people. There are some situations where your loan interest payments are tax deductible, or your loan must be filed as income, but these are rare. To get a full understanding, we’ve compiled some basic information about taxes on personal loans.
(Remember that taxes can often be complex. This article is not meant to constitute personal tax advice. Please consult your tax advisor for guidance.)
Are personal loans taxable income?
In most cases, no. Personal loans are not considered income since they need to be repaid. To be classified as taxable income, money must be earned from streams such as jobs or investments. Because personal loans are not income, they do not need to be reported on your taxes. However, if a loan is canceled or forgiven, it may count as income that will be taxed.
Taxes on canceled personal loans
If a personal loan is not repaid and the lender forgives any amount of the loan balance, this may create cancellation of debt (COD) income. Because a COD occurs when there’s an agreement to settle a debt, any amount forgiven is considered income and will be taxed.
If your COD on a particular loan was at least $600 in the tax year, you should expect to receive a Form 1099-C specifying the amount that must be reported as income on your tax return. 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 will now be considered taxable income reported on Form 1099-C. (Don’t be misled by a debt settlement company who may suggest otherwise. For more on this topic, visit our article on the dangers of trusting a debt settlement company.)
Are personal loan repayments tax deductible?
No, repayments and interest paid are not tax deductible if you use the loan for personal expenses such as home improvements or debt consolidation. If any portion of the loan is used for IRS-approved business expenses, you may be able to deduct interest paid on a personal loan.1 Common scenarios where you can deduct interest include:
Business expenses – Some business-related costs like travel, rent and office equipment could be eligible. Just be prepared to submit an itemized report of what portion of the interest paid on the loan went toward business expenses when filing taxes.
Vehicles for business purposes – If you obtained a loan to purchase or repair a vehicle, and that vehicle is used solely for business, then all the interest might be deductible. If the vehicle is used half business/half personal, then half of the interest may be deductible.
For instance, if you use 80% of a personal loan for personal expenses – like a home plumbing repair or family trip – and the remaining 20% for business purposes, you can deduct only 20% of the interest paid as a business expense. The remaining 80% of the interest is non-deductible since it was used for personal expenses. Learn more about what is considered a personal expense by exploring different types of personal loans. Be aware that not all lenders allow their personal loans to be used for business purposes and applying for a loan under false pretenses can have negative consequences.
Be tax aware and prepared
Understanding how personal loans affect your taxes will make you more confident when tax season rolls around. And, if you can, file early! The sooner you file, the sooner you’ll get your refund – and who doesn’t love that?
1. Internal Revenue Service. “Deducting Business Expenses.” https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses (Accessed Mar. 15, 2022)
*This article has been updated from previous postings on February 23, 2021, and October 23, 2019. Matt Diehl and Andrea Hoyt contributed.
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.
