Are personal loans tax deductible? | Learn about tax implications

What are the tax implications of personal loans?

Don’t get caught off guard during tax season. Here’s what you need to know about taxes and personal loans.

Refinancing student loans, major life events, buying a car or even funding a vacation can all lead you to consider a personal loan. However, additional income can mean additional work when it comes to taxes. Get the facts about what you should look out for, what’s deductible and the paperwork you might need.

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    Borrowing money? Here are the tax implications

    Are personal loans considered taxable income?

    For the most part, no. When you receive a loan, it’s not considered taxable income. Taxes come into play on the part of the lender and usually aren’t something that you need to worry about.

    The only exception is when a loan is forgiven. Cancellation of debt (COD) income is when your lender doesn’t require you to repay your loan’s principal or interest. Suddenly the loan becomes income simply given to you by the lender.

    Even with COD income, there are exceptions — for example, forgiveness in the form of a gift. If you’re forgiven an amount that’s less than your liabilities minus your assets, you’re off the hook for paying taxes for that amount.

    Are personal loans tax deductible?

    No, repayments on a personal loan are not tax-deductible. Just as funding from it isn’t considered taxable income, making payments on a personal loan — or on interest for it — isn’t deductible.

    However, there are some exceptions. Here are a list of uses for personal loans that are tax-deductible:

    • Investments
    • Business expenses
    • Qualified education expenses

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    What loans are tax deductible?

    You may have heard that certain loans are tax deductible, and you heard right. Interest payments on the following loans are usually tax deductible:

    • Student loans. If you’re paying off your student loans, you can deduct the interest that you’ve paid up to $2,500 per year. Deductions only apply if you’ve taken the loan out from a qualified lender. Private loans from friends and family aren’t considered deductible.
    • Mortgages and home equity loans. Any interest paid on your first or second mortgage is deductible up to $1 million. For home equity loans, your qualifying balance is the equity of your home or $100,000, whichever is less.
    • Business loans. Very specific requirements and qualifications go into deducting business loan interest payments from your taxes. If you’re using the loan for business and personal reasons, then you cannot deduct the entirety of the interest payments.

    Remember that with all things tax-related, there are exceptions. Be sure to double-check with your CPA before filing.

    Lending money? Here are some tax implications you need to know

    I lent money to a friend and am receiving interest. Is the interest considered taxable income?

    Yes, the interest payments you receive are taxable. Even when you don’t include interest, the IRS may treat would-be interest as taxable.

    When it comes time to do taxes, you’ll need to file Form 1099-INT to avoid being dinged by the IRS. For Form 1099-INT, you’ll need a few pieces of information:

    • Your full name and address.
    • The Social Security number of the person you loaned money to.
    • The income you made on interest.
    • Any tax-exempt interest.

    Do I have to charge interest on a loan to a family member?

    There is no easy answer to this one. Some experts advise that you charge interest on a loan to a family member no matter what to avoid complications. The government may end up taxing you on interest that you should have charged, or taxing it as a gift.

    Gifts come with an annual exemption limit. In other words, every year there is an amount that you can “gift” to someone without paying taxes on that gift. For 2017, that amount is $14,000. If you were to gift your family member $10,000 and he/she were to gift you that amount back over time, you could be circumventing certain rules. No taxes would need to be filed, and no interest would need to be charged.

    What’s the difference between a gift and a loan?

    Gifts are any amount that you give under $14,000 a year. For anything below that, the government doesn’t need to know why it was given or if it’s being paid back.

    For loans greater than that, you should follow the IRS guidelines for charging interest. This includes looking at the applicable federal rate and filing income tax on the interest payments you receive.

    • What to keep in mind when lending money to friends and family

    Remember that unless you draw up a full loan contract with the person you’re lending to, the person may not be legally obligated to pay you back. If you’re lending a large amount of money, you may want to consider having a documented contract.

    In general, lending money to family or friends could cause tension in the relationship. One idea to consider is only giving money to family or friends that you can afford to not get back.

    It’s also important to talk through the tax implications with a tax professional if you’re unsure of what to file. Instead of getting through your taxes and finding out that you owe much more than you set aside, work it out beforehand to save yourself potential frustrations.

    Bottom line

    Taxes can be confusing. Keep in mind that whether you’re borrowing or lending, there are ways for you to investigate deductibles and payments. As frustrating as it can be, getting the research done ahead of time can save time and money down the road.

    Before you file, be sure to speak with a qualified tax professional if you have any questions.

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    2 Responses

    1. Default Gravatar
      RuhbieJanuary 29, 2018

      Do I need to pay taxes on my loan coming from India bank? He wants me to settle tax for the non-residential tax before he transfers my loan to my bank account. He explained that I need to pay taxes to prove that I am a citizen of Taiwan.

      • Staff
        RenchFebruary 7, 2018Staff

        Hi Rhubie,

        Thanks for your inquiry.

        The tax mentioned on the above article is applicable to the US only so I’m afraid I could not really give a comment for possible tax implications on your loan in India. It would be best that you contact the bank or your lender directly on this matter.

        Best regards,
        Rench

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