Personal Loans and Taxes: What You Need to Know

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Disclaimer: Upstart is not a financial advisor, the following content is for informational purposes only.

It’s a good idea to understand how a personal loan may impact your taxes, especially since you don’t want to end up owing or paying penalties you may not have known about. 

Along with your mortgage, business loan, or investments, learn the specific circumstances a personal loan should be taken into consideration, come tax time and dealing with the IRS. 

This article outlines basic information for personal loans as it applies to your taxes but should not be considered professional tax advice. Remember to consult your tax professional if you need further advice.

Is personal loan interest tax deductible

Personal loans won’t be a factor for your taxes because it is not considered income. In other words, you don’t need to report it to the IRS because you’re not making money from the loan. 

A personal loan is a debt that you need to repay in full, and as long as you have a plan to continue paying off that debt, you won’t need to worry about the impact it has on your taxes. 

However, there are atypical instances in which there are tax implications, for example, if the lender forgives a part of the loan. In this instance, the amount that is paid off for you from the lender may be included in your taxable income for that year. 

Specific scenarios in which a personal loan might be tax deductible

The interest you pay on a personal loan is generally not tax deductible. Unlike a mortgage, you cannot deduct the interest you pay unless you use the funds for a specific reason that meets the eligibility requirements. Here are a few requirements you should know about:

  • Business expense: One requirement is using a personal loan for a business expense. You may then be able to deduct the interest from your business income. The caveat to this is that lenders may not allow you to take out a personal loan to pay for a specific business expense, so make sure to check with your lender if you’re thinking about using a personal loan for this reason. 

As with anything tied to a business, you should be keeping accurate records of how you spend the money, specifically for tax purposes. In the event of an audit, you want to have an accurate paper-trail. 

  • Education: Another exception could be if you used the personal loan for an educational expense or refinanced a student loan for yourself, your spouse, or dependent. In these scenarios, you may be able to deduct up to $2,500 in interest payments each year. However, keep in mind that refinancing a student loan with a personal loan may not make sense, as student loans typically have lower interest rates than a personal loan. 

Note: In both of these instances, it’s important to double check with the lender to see if personal loans can, in fact, be used to pay a business or educational expense. 

Stocks: If you took out a personal loan to buy stocks, you might be able to deduct the interest. There are restrictions—you can only deduct up to the amount of investment income for the year. Any amount over that can be rolled over into the following year.

Personal loan to pay taxes

If you know you will owe taxes and don’t have the cash on hand to pay for it, a personal loan may come in handy. The interest on a personal loan is generally lower than a credit card, for example, so it may be a less expensive option to pay off what you owe in taxes.

Remember, have a plan to pay off the debt and pay it off on time each month so your credit score doesn’t take a dip. 

Stay prepared for taxes throughout the year

Generally speaking, having a personal loan likely won’t affect your taxes. However, the  situations above may call for the interest on the loan to be tax deductible or maybe even filed as income. 

Preparing for your taxes can be time consuming, so being mindful of making this a year-round process can help. Consider keeping accurate and organized records, especially if you freelance or have your own business. 

Luckily, personal loans don’t generally play a large part in your taxes or tax planning. If you have exemptions for the personal loan that you used, talk to a tax professional to make sure you are taking the right steps when you file.

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