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Can personal loans be tax deductible?

The majority of the time, the answer is no, however there are exceptions

By Troy Segal

Updated April 22nd 2021

Reviewed by Thomas Brock

The interest paid for individual loans is not tax-deductible. If you borrow to buy an automobile for personal use , or to pay for other personal expenses The interest you pay on that loan will not affect the tax burden. In the same way, interest on credit card balances is also generally not tax deductible.

Key Takeaways

Interest paid on personal loans as well as car loans and credit cards is generally not tax-deductible.

But, you might be able to claim interest you’ve paid to make your tax filings if you take out an loan or accrue credit card charges to fund business expenses.

The interest earned on eligible student loans that are used to pay for certain educational expenses, can be tax deductible.

Debt-related expenses that can be Reimbursed

Though personal loans are not tax-deductible however, other kinds that are loans are. The interest you pay on mortgages, student loans, and business loans often can be deducted on your annual taxes, effectively reducing your taxable income during the year.

But, certain requirements are required to be met to be eligible for these deductions. For instance, mortgage interest is only deductable in the event that the loan was used to pay for an investment in a home as a primary residence. You could be eligible get a tax credit–which directs reduction of the amount tax that you must pay rather than your taxable income–for mortgage interest, if you were given a mortgage credit certification as part of a federal program to help low-income housing.1

It is not necessary to get a tax break to afford the cost of a personal loan. If you’re interested in taking out an individual loan but aren’t certain what amount you’ll be able repay, you ought to look into an individual loan calculator to determine how much you can pay each month.

Exemptions to the Rule

If you take out a personal loan or credit card in order to pay for business expenses in addition to personal expenses, you might be eligible to claim the interest paid on those expenses on your taxes. The borrower must also be the person legally responsible for the loan and be able to determine the percentage of interest paid is attributable the legitimate company expenses.2

Similar to this, if you make the personal loan to purchase a vehicle with a purpose for business in mind, then a portion or even all the amount of interest paid on the loan is tax-deductible. If you use the vehicle exclusively for business purposes, the entire interest is deductible. If you use it for both business and personal purposes, you can reduce loan interest in proportion to the time you utilize the vehicle for business purposes. If you spend 60 percent of your time driving in business-related pursuits for instance, 60% of your annual interest is deductible.2

This exception also applies to using personal loan to invest in the form of an S corporate (S subchapter) partnership, the limited liability company (LLC). However, the rules governing the deductions are a bit hazy, so it is wise to consult an expert tax advisor to determine what deductions you are able to take off.2

To allow the interest earned on a student loan to be tax deductible and tax-deductible, the loan must have been taken out by the individual either their spouse or a dependent.

Student Loans

Interest of students’ loans (along with loan origination fees and any capitalized interest) is tax deductible, provided that the borrower’s income falls less than a certain amount. The Internal Revenue Service (IRS) stipulates that an individual’s modified adjusted income (MAGI) must be less than $85,000 (or $170,000 when filing a joint tax return) for the tax year 2019.3

The deduction can lower amounts of earnings that is subject to federal taxation by as much as $2,500.3 The amount is classified as an adjustment of income and can be claimed even if a taxpayer itemizes deductions (as instead of taking the standard deduction).

The loan must be the basis of a “qualified” student loan which is which is used to fund qualified expenses for higher education. That means the loan will cover the cost of going to an educational institution that is eligible and could include tuition/fees student activity fees, books, and other expenses deemed required by the IRS.4 An educational institution that is eligible is any university, college, or vocational school that is eligible to participate in the financial aid program run through the U.S. Department of Education. This also includes graduate schools.