Cash News
When you take on new debt, you might wonder how that money will come into play come tax time. Filing your taxes can be a complex process, and you’ll have to report key information to the IRS about your income, household, debt, and more.
Personal loan proceeds don’t qualify as income and, as such, you generally don’t need to share your loan information on your tax return.
However, there are instances when your personal loans may be relevant.
Are personal loans considered taxable income?
When you file your income taxes each year, the IRS will ask you to report your taxable income. That’s your gross income, wages, salary, interest, dividends, rental income, business income, capital gains, and other forms of income. The grand total of all of these forms of income is how much you’ll pay taxes on.
Personal loans aren’t considered income, so you generally don’t have to report them on your taxes.
Is personal loan interest tax-deductible?
Additionally, personal loan interest is not tax-deductible. With other types of loans, like student loans or mortgages, for example, you can lower your tax bill by claiming the interest paid on those loans. However, personal loans are generally for personal use like home improvements, debt consolidation, and medical expenses — as such, the interest on your loan repayment can’t be deducted on your tax bill.
When you may be required to report your personal loans
There are instances when your personal loan may have tax implications — depending on the loan, its current status, and how you spent the money.
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All of or a portion of the loan was forgiven: If your lender forgives some or all of your personal loan, that canceled debt will likely be considered taxable income. If this is the case for you, your lender will send you a special tax form, known as Form 1099-C, which will tell you the canceled amount and how much is now considered taxable income.
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You used your personal loan for business or educational expenses: In most cases, the interest you pay on your personal loan is not tax-deductible in the same way that student loan or business loan interest is. However, if you can prove to the IRS that you used all or a portion of a personal loan for business purposes or qualified educational expenses, you may be able to claim that interest on your taxes.
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You used the money to make tax-deductible investments: If you used your funds to invest in taxable investments like stocks or bonds, you may be able to deduct investment interest — but it’s worth noting that borrowing a personal loan to fund your investments isn’t the safest bet.
How to prepare for tax time as a personal loan holder
When you get a personal loan, there are a few moves you can make to make sure that you’re prepared ahead of tax time.
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Make sure you have the right forms: Personal loan forgiveness isn’t common, but if your lender has forgiven some or all of your loan, make sure you have a copy of your 1099-C form to avoid any inaccuracies on your tax return.
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Keep a record of your expenses and investment interest: If you used your personal loan for a qualifying business expense, educational expense, or a tax-deductible investment, make sure you keep a record of those expenses and any related interest payments. That way, come tax time, you may be able to make your case to the IRS and reduce your tax bill.