As a form of debt, personal loans usually don’t have to be reported as income when you file your taxes. The only times a personal loan may affect your taxes are if the loan is forgiven, settled for less than you owe, or if you used the loan for business or education expenses.
Continue reading to learn what counts as taxable income and how a personal loan can impact your tax situation.
Taxable income is money or property you receive that doesn’t have to be repaid. Examples of taxable income include:
Personal loans are not considered taxable income in most cases. When you file your income taxes each year, the IRS will ask you to report your taxable income. Items or accounts you have to repay, such as loans or credit cards, aren’t taxable.
Even though your student loan or personal loan may temporarily increase your bank account balance, the loans will eventually have to be repaid, so you don’t have to pay taxes on the loan amount.
The interest you pay on a personal loan is not tax-deductible.
With some types of debt, such as student loans or home mortgages, you may be eligible to deduct the interest you paid over the year. This reduces your taxable income, meaning you’ll owe less when you file.
However, personal loans can be used for many purposes, such as home improvements or debt consolidation, so the IRS doesn’t provide any tax breaks for repaying the loan. As a result, you can’t deduct any part of your personal loan payments.
There are instances when your personal loan may have tax implications — depending on the loan, its current status, and how you spent the money.
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You settled the debt for less than you owe: If you entered into a debt settlement agreement — where the creditor agrees to accept less than the outstanding balance and discharge the loan — you’ll owe taxes on the discharged amount. For example, if you owe $10,000, but the lender agrees to settle the loan for $7,000, the discharged $3,000 is taxable as income. When the lender agrees to settle the account, you’ll receive Form 1099-C, which details the canceled debt amount and how much of the forgiven debt is now taxable income.
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You used your personal loan for business or educational expenses: In most cases, the interest you pay on your personal loan is not tax-deductible in the same way that student loan or business loan interest is. However, if you can prove to the IRS that you used all or a portion of a personal loan for business purposes or qualified educational expenses, you may be able to claim that interest on your taxes.
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You used the money to make tax-deductible investments: If you used your funds to invest in taxable investments like stocks or bonds, you may be able to deduct investment interest — but it’s worth noting that borrowing a personal loan to potentially boost investment income isn’t the safest bet. The rules for claiming a tax deduction in this instance are also complex, and you must itemize your deductions to qualify.
Tip: If you aren’t sure how to handle your loan and taxes, consult with a tax professional. You can use the National Association of State Boards of Accountancy’s locator tool to find a certified public accountant (CPA) near you.
When you get a personal loan, there are a few moves you can make to ensure you’re prepared ahead of tax time.
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Make sure you have the right forms: Personal loan forgiveness isn’t common, but if your lender has forgiven some or all of your loan, keep a copy of your 1099-C form to avoid inaccuracies on your tax return.
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Keep a record of your expenses and investment interest: If you used your personal loan for a qualifying small business expense, educational expense, or a tax-deductible investment, make sure you keep a record of those costs, your monthly debt payments, and how much you paid in interest. That way, come tax time, you can make your case to the IRS and reduce your tax bill by deducting your interest payments. Maintaining business accounts completely separate from your personal accounts can make it easier to manage your taxes.
Remember: Taxpayers can use tax deductions and credits to reduce their tax liability.
If you misreport a personal loan as income, you’ll likely pay a higher tax rate and owe a larger tax bill. If you believe you’ve filed incorrect income amounts on a previous tax return, you’ll need to file an amended tax return.
Interest that you pay on a personal loan during your loan repayment term is rarely tax-deductible, unless you use it for a qualifying education or business expense.
A personal loan doesn’t affect your tax refund in most cases. As a form of debt, it isn’t taxable income, so it won’t affect your refund.
Because a personal loan is a type of debt, it doesn’t count as taxable income and won’t impact your tax bracket.
If you used a personal loan to pay off debt, it does not count as taxable income, and you don’t need to report it to the IRS.
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