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Can personal loans be tax deductible?

Most of the time, no, however there are some exceptions

By Troy Segal

Updated April 22nd 2021

Review by Thomas Brock

The interest paid on personal loans is not tax deductible. If you use the money to purchase a car for personal use or to cover other expenses that you incur, the interest you pay on that loan does not reduce the tax burden. Similarly, interest paid on credit card balances is generally not tax-deductible.

Key Takeaways

The interest charged on personal loans or car loans, and credit cards is generally not tax deductible.

But, you might be eligible to claim interest you’ve paid when you file your taxes when you get a loan or accrue credit card charges to finance business expenses.

Interest on qualified student loans that serve to cover eligible educational expenses, is tax-deductible.

The Debt Expenses that Can Be Deducted

While personal loans are not tax deductible, other types of loans are. Interest paid on student loans as well as business loans typically can be deducted on your annual taxes which reduces your tax-deductible income during the year.

But, certain requirements are required to be met to be eligible for these deductions. For example, interest on mortgages is only tax-deductible in the event that the loan was taken out to pay for an investment in a home as a primary residence. It is possible get a tax credit–which directly reduces the amount of tax you have to pay rather than your taxable income–for mortgage interest if you were granted a mortgage credit certificate as part of a federal program to help people with low incomes housing.1

It is not necessary to get a tax break to afford the cost of a personal loan. If you’re considering taking out personal loan but aren’t certain what amount you’ll have to repay, you ought to think about using a personal loan calculator to determine how much you can pay every month.

Exclusivity to the Rule

If you make use of a personal loan or credit card in order to fund business expenses in addition to personal expenses, you might be eligible to claim interest on these expenses on your taxes. You must be the individual legally responsible for the loan as well as be able of identifying what portion of the interest that you pay is due to legitimate business expenses.2

Similar to this, if you make a personal loan to purchase a vehicle which is used for business in mind, then a portion or even all the amount of interest on the loan is tax deductible. If the vehicle is used solely for businesspurposes, then all of the interest is tax deductible. If you use the vehicle for both personal and business purposes, you can reduce loan interest in proportion to the amount of time you use the vehicle for business. If you use 60 percent of your time driving on business-related activities for instance, 60% of your annual interest you pay is deductible.2

This exception also is applicable to the use of personal loan to purchase one of the following: S corporation (S subchapter) partnership, a limited liability company, or limited liability corporation (LLC). However, the rules governing these deductions are complicated, so it is wise to seek the assistance of an expert tax advisor to figure out what you can claim off.2

For interest on a student loan to be tax deductible and tax-deductible, the loan must have been taken out by the person who took it out or their spouse, or a dependent.

Student Loans

Interest of students’ loans (along together with loan origination fees and any capitalized interest) is tax deductible, as long as the borrower’s earnings are lower than a specific amount. It is the Internal Revenue Service (IRS) specifies that the individual’s modified adjusted gross income (MAGI) must be less than $85,000 (or $170,000 if filing a joint return) for the tax year 2019.3

The deduction can lower the amount of income that is subject to federal income tax by up to $2,500.3 The amount is classified as an adjustment to income . It can be claimed even if an individual taxpayer takes deductions (as as opposed to making the usual deduction).

The loan must be a “qualified” students loan, which is one used to pay for qualified expenses related to higher education. That means the loan covers the costs for the tuition at an eligible educational institution and can include tuition/fees, student activity fees, books as well as other expenses considered necessary by the IRS.4 An eligible educational institution is any college, university or vocational school which is able to take part in the financial aid program run by the U.S. Department of Education. It also includes graduate school.