Personal loans and taxes

Personal loans and taxes

Personal loans and taxes

Taxes don’t have much of a role in your personal loans, but personal loans are counted as income in certain circumstances or when your interest payments tend to be tax-deductible. You should report it then.

Here are the tax implications you should be aware of regarding personal loans:

Personal loans – Are they taxable income?

Personal loans are not considered taxable income for the most part. When you receive a loan, it does not fall under taxable income. Usually, the taxes come into play on the part of the lender. The only exception is when the loan gets forgiven.

COD is a cancellation of debt income and occurs when your lender does not have the requirement for you to repay your loan’s interest or principal. The loan just becomes and income the lender gives to you. If you get a Form 1099-C from the lender, you have to write the amount received on the form as taxable income.

Speaking of COD income, there are a few exceptions. Say you filed for Chapter 7 or 13 bankruptcy, and your debt settled in a Title 11 bankruptcy proceeding, you don’t have to pay taxes on the debt. Another example is that of forgiveness – in the shape of a gift. You don’t have to pay taxes if an amount which is less than your liabilities minus your assets.

Personal loans – Are they tax deductible?

The repayments on personal loans are not tax-deductible. Funding from a personal loan is not considered as taxable income, that is why making payments on a personal loan or on interest is not deductible. But there are a few exceptions.

Following uses of personal loans is tax-deductible:

  • Business expenses
  • Investments
  • Qualified education expenses

Personal loans – which types are tax-deductible?

The interest payments on the following loans are tax-deductible normally:

Business Loans: There are some particular qualifications and requirements involved in deducting business loan interest payments from the taxes. If you have taken a loan for business use as well as personal reasons, you cannot deduct the sum of interest payments, only the % of those you used in funding your business. You could always use a personal loan calculator amount to know about your budget and how to go about personal loan monthly payments.


Home Equity & Mortgage Loans: If you are filing a joint return, you can deduct interest on the first $750,000 of your first/second mortgage. Married taxpayers could deduct interest on the first $350,000 if they are filing a separate return.

 Home equity loans are tax-deductible when the loan funds are used to build, purchase, or renovate your home.

Student Loans: Paying off a personal loan for students? You could deduct about $2,500 in interest per year. If you have taken the loan from a qualified lender, only then the deductions will apply. You should know that private loans from friends and family are not deductible.

You should know that there are always exceptions with things that are tax-related. Don’t forget to double-check with your CPA before you file.

Charging Interest on a loan to a family member

Some experts suggest that you charge interest on a loan to a family matter to avoid the tax implications. The government might impose a tax on you for the interest that you should have charged in the first place ox taxed it as a gift.

There is an annual exemption limit for gifts. Every year, you have an amount that you could gift to someone without paying taxes. Say you are gifting $10,000 to a family member and they have to gift you that amount back over time, there is a chance that you are evading some rules. No taxes will require filing nor is interest going to be charged.

Final Words

It can be a bit confusing to understand and familiarize oneself with the tax implications of personal loans. You should know that whether you are borrowing or lending, there are many ways you can calculate and find out about deductibles and payments. Doing research beforehand will save you both time and money in the long run. For clearing any confusion, see that you talk to a qualified tax professional.