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 tax implications. How will this type of loan impact your annual tax filing with the IRS?
The short answer is 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, here’s some more information on personal loans and taxes:
Do personal loans count as taxable income?
In most cases, no. Personal loans are not considered income since they need to be repaid. The only exception is if the loan is forgiven and the lender issues a cancellation of debt (COD).
A COD means you’re no longer liable to repay the loan’s principal or interest. Any money received from a COD is considered income and can be taxed. In this case, you’ll likely receive a 1099-C form from the lender to submit when filing taxes the following year.
For example, let’s say you took out a personal loan for $12,000. By the time you paid back $9,000 the debt is forgiven or cancelled. That means you still have $3,000 remaining from the original loan that is unpaid. That $3,000 will now be considered income by the government, and you will owe taxes on it the following year. You will also be required to submit a 1099-C with your tax return.
Are repayments and interest paid on personal loans tax deductible?
For the most part, no. Repayments and interest paid are not tax deductible if you use the loan for personal uses, such as home improvements or debt consolidation. However, if you use the money for business purposes,* you might be able to deduct some, or all, of the interest paid. 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 the vehicle is used solely for business, then all of the interest might be deductible. If the vehicle is used half business/half personal, then half of the interest may be deductible.
*OneMain Financial does not offer small business loans.
Be aware and be prepared
By understanding how your current or future personal loan could affect your taxes, you can feel more confident when tax season rolls around.
If you would like more information regarding personal loans and filing taxes, please contact your lender or a tax professional.
|Tax Day Extension Reminder|
|For 2020, the federal tax filing deadline has been extended from April 15 to July 15. Learn more at IRS.gov.|