Key takeaways
- Since lenders require you to repay a personal loan, they are considered debt and not taxable income.
- If a lender forgives some or all of the loan, you may have to pay taxes on the forgiven loan amount.
- The IRS allows taxpayers to deduct interest on personal loan funds used for business purposes.
Personal loans can cover nearly any expense and are generally not considered taxable income unless the loan is forgiven. Understanding how a personal loan can affect your taxes in different circ*mstances can help you file an accurate tax return.
Are personal loans taxable income?
Taxable income includes:
- Salaries.
- Wages.
- Freelance earnings.
- Tips.
- Bonuses.
- Winnings.
A personal loan, on the other hand, is a form of debt that must be repaid. Because of this, it doesn’t qualify as taxable income. That’s true even if you used the proceeds for personal needs, such as covering an emergency expense.
Exception: Cancellation of debt (COD) income
If there’s ever a point where your loan gets fully or partially canceled, you’ll receive a1099-C tax form from your lender that issued the cancelation of debt. You’ll only get this if the lender cancels $600 or more of your personal loan.
If any part of your debt was canceled, you didn’t pay it back, which means it’s then considered income. At this point, the amount is consideredcancellation of debt or COD income. You’ll be required to pay taxes, but only on the canceled amount.
However, if your debt was discharged as part of Chapter 7 or Chapter 13 bankruptcy, it is not subject to being taxed.
When you don’t have to report forgiven loan amount
In some situations, you do not have to report the forgiven loan amount as income. If the amount is forgiven as a gift from a private lender, or if the debt is forgiven in the lender’s will, the amount does not have to be reported as income. Otherwise, it must be included when filing your taxes.
In this instance, you’re not on the hook for the forgiven amount since a gift has its own tax requirements through estate and gift tax. This won’t impact your tax return unless more than $18,000 is forgiven.
What happens if you don’t report a 1099-C?
The IRS considered canceled debt income because you didn’t repay a loan you originally agreed to pay back. If you received a cancelation of debt from your personal loan lender through a 1099-C form, the IRS received a copy of that form, too. That means they will know if you fail to report that income, and you will typically have to pay a penalty.
Tax deductions and personal loans
A tax-deductible expense is money a taxpayer can subtract from their gross income to reduce their reported income and, therefore, the taxes they have to pay.
Interest payments onstudent loans, mortgages and business loans can be reported as tax deductions. However, personal loan interest payments only qualify as tax-deductible under certain circ*mstances.
Are personal loan payments tax deductible?
Personal loans’ tax deductions depend on how you use the money. You cannot deduct payments from your annual income for tax purposes when personal loans are used for personal needs, such as:
- Debt consolidation.
- Paying for an emergency expense.
- Covering a medical bill.
Is interest on a personal loan tax deductible?
If you borrow a personal loan and use any portion of it for business expenses, you can deduct the interest paid on that part of your personal loan.
Imagine you used any personal loan to cover office equipment or a vehicle you use only for your business. You could itemize those deductions and report the portion of the loan that went towards those expenses.
Other than that, personal loan payments can’t be deducted.
Do I have to report a personal loan on my taxes?
In most instances, you don’t need to report a personal loan on your taxes since it’s not considered income.
If any part of your loan gets canceled, you’ll need to report the amount canceled as income because it’s the amount you were given and didn’t get paid back.
However, if you used any of your loans for business expenses, you can note that in your itemized deductions on your tax return.
The bottom line
The IRS generally does not consider personal loans taxable, as these loans do not count as income. However, if you had a loan canceled, that may count as taxable income.
Tax laws change regularly, so you’ll want to consult a certified public accountant, a tax preparer or a tax advisor who is well-versed in the most recent updates.
FAQs
Taking out a personal loan doesn't typically impact your taxes. You generally don't need to consider personal loan proceeds as taxable income, and you won't get to deduct the interest you pay on your tax returns.
Does the IRS look at personal loans? ›
The IRS doesn't consider a loan taxable income. But, if your lender forgives or cancels more than $600 of your loan, the loan amount you received could be subject to income tax. Usually, cancellation of debt (COD) happens if a borrower is in financial trouble and negotiates for debt relief.
Do I have to report loans on my taxes? ›
Do I have to report a personal loan on my taxes? In most instances, you don't need to report a personal loan on your taxes since it's not considered income. If any part of your loan gets canceled, you'll need to report the amount canceled as income because it's the amount you were given and didn't get paid back.
Do I have to pay taxes if I loan someone money? ›
Any interest you receive will be treated as income for tax purposes. For instance, if you loan a family member $45,000 for a year, and the applicable federal rate for that kind of loan is 4% and that's how much you charge, you'll receive approximately $1,800 in interest to report as income and pay any taxes due.
Can I write off a bad personal loan on my taxes? ›
To be deductible, a debt must be a bona fide loan with an expectation of repayment and may include interest and a promissory note. The debt must be 100% worthless before it can be deducted. Documented efforts to collect the debt must be made, such as letters, invoices, and phone calls.
Do personal loans have to be reported? ›
You generally don't need to consider personal loan proceeds as taxable income, and you won't get to deduct the interest you pay on your tax returns. However, there are a few rare exceptions to this. If you use your personal loan for business purposes, you may be able to deduct the interest you pay.
How do I show a personal loan on my tax return? ›
For the most part, personal loans are not considered taxable income and therefore are not reported on federal income tax returns. While personal loan funds increase your bank account balance and can be used similarly to money that you earn, they are not the same.
Do loans give you a tax break? ›
Though personal loans are not tax-deductible, other types of loans are. Interest paid on mortgages, student loans, and business loans often can be deducted on your annual taxes, effectively reducing your taxable income for the year.
Can a personal loan be forgiven? ›
You can't have a defaulted loan forgiven, but defaulted loans may qualify for discharge, depending on the loan and the program.
What is considered a personal loan? ›
A personal loan is a type of borrowing with fixed interest, relatively quick funding and predictable payments. You can use personal loans for a wide range of goals, and they can be a good option for consolidating high-interest debt or financing a purchase. That said, they can also be an expensive way to borrow.
Personal loans aren't considered income, so you usually don't pay taxes on them. While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.
Do I have to pay taxes if someone pays off my loan? ›
What are the tax implications? Answer: If a friend or family member pays your student loans off, it is probably a non-taxable gift to you. However, your friend or family member may be responsible for filing gift tax returns and for paying any applicable gift tax on the payment.
Can I loan money to a friend interest free? ›
While you may be tempted to charge an interest rate of zero percent, you should resist the temptation. Here's why: When you make an interest-free loan to someone, you will be subject to “below-market interest rules.” IRS rules state that you need to calculate imaginary interest payments from the borrower.
How do I make my personal loan tax deductible? ›
Interest paid on a personal loan typically isn't tax deductible. If money from a personal loan goes toward certain business, college or investment expenses, the interest payments could be tax deductible.
Can you claim private loans on taxes? ›
In most cases, no, however, there are a few exceptions to the rule. You can get tax-deductible interest on personal loans if you use the loan proceeds for business expenses, qualified education expenses, or eligible taxable investments.
How to use debt to reduce taxes? ›
Buy, Borrow, Die Strategy: This strategy involves buying appreciating assets, borrowing against them, and letting heirs inherit the assets to avoid capital gains tax. Managing Leverage Risks: Leveraging debt can increase wealth, but it also magnifies risk, liquidity issues, and costs, hence needs careful management.
Does IRS look at personal bank accounts? ›
The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
Do loan officers report to IRS? ›
If you're like millions of homeowners, you recently received a familiar, innocuous-looking document from your lender. Called Form 1098, it totes up how much interest you paid on your mortgage last year. Your lender is required by law to fill it out and send it to the IRS.
Do personal loans verify income? ›
Most personal loan lenders will require proof of income, even if they don't disclose their minimum income requirements.
What triggers a personal IRS audit? ›
Unreported income
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.
