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Personal Loans and Lending

Can Personal Loans be tax-deductible?

Free stock photo of background, banknote, black Usually the answer is no, however there are some exceptions

By Troy Segal

Updated April 22nd, 2021

Reviewed by Thomas Brock

The interest paid in the personal loans is not tax-deductible. If you use the money to purchase the car you want for your private use or to cover other expenses that you incur The interest you pay on that loan will not affect your tax liability. Similarly, interest paid on credit card balances are generally not tax-deductible.

Key Takeaways

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

However, you may be able to claim interest you’ve paid when you submit your tax returns in the event that you obtain a loan or pay credit card charges to finance business expenses.

The interest earned on eligible student loans, which can be used to fund qualified educational expenses, is tax-deductible.

The Debt Expenses that Can Be Reimbursed

While personal loans are not tax-deductible but other types such loans are. Interest paid on mortgages, student loans, and business loans often can be deducted on your annual taxes and reduce your tax-deductible income during the year.

But, certain requirements must be met to qualify to be eligible for the deductions mentioned above. For instance, mortgage interest is only tax-deductible when the loan was used to fund an investment in a home as a primary residence. You may be able get a tax credit that directly reduces the amount of tax you owe rather than your taxable income–for mortgage interest, if you were granted a mortgage credit certificate under a program of the government for low-income housing.1

It is not necessary to get an exemption from taxes to get the cost of a personal loan. If you’re thinking of applying for an individual loan but aren’t certain what amount you’ll be able to repay, you ought to consider using an individual loan calculator to figure out what you can afford each month.

Exclusivity to the Rule

If you make use of a personal loan or credit card in order to finance business expenses in addition to personal expenditures, you may be eligible to claim the interest paid on those expenses on your taxes. The borrower must also be the one legally responsible for the loan, and you must be able of identifying the portion of the interest that you pay is due the legitimate company expenses.2

Similarly, if you use the personal loan for the purchase of a vehicle which is used for business in mind, then a portion or all of the interest on the loan can be tax-deductible. If you are using the vehicle exclusively for business purposes, the entire interest is deductible. If you use the vehicle for both business and personal purposes, then you can take deductions for loan interest proportionate to the time you use the vehicle for business purposes. If you devote 60 percent of your driving time on business-related activities for instance, 60% of the annual interest you pay is deductible.2

This exemption also applies to using a personal loan to purchase one of the following: S company (S subchapter) partnership, a limited liability company, or the limited liability company (LLC). However, the rules for the deductions are a bit hazy and it is recommended to enlist the aid of an experienced tax professional who can figure out what you can claim off.2

In order for the interest paid on a loan to be tax deductible, the loan must be repaid by the person who took it out, their spouse, or by a person who is a dependent.

Student Loans

Interest of students’ loans (along together with loan origination fees and any capitalized interest) is tax deductible, providing the borrower’s income is 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 in the case of filing a joint return) for tax year 2019.3

The deduction is able to reduce amounts of earnings that is subject to federal income tax by up to $2,500.3 The amount is classified as an adjustment to income and can be claimed even when a taxpayer itemizes deductions (as instead of making the usual deduction).

The interest must be on a “qualified” student loan that is that is used to cover higher education expenses. This means the loan covers the costs for attending an eligible educational institution and could include tuition/fees charges for student activity, books, and other expenses deemed essential according to the IRS.4 An eligible educational institution is any university, college or vocational institution that is eligible to participate in the financial aid program that is administered by the U.S. Department of Education. It also includes graduate school.