No, personal loan interest is not tax deductible. However, if you use the loan money for your business, taxable investment, or higher educational purpose then the interest might be tax deductible.
Thinking about taking a personal loan but not sure whether personal loan interest is tax deductible or not.
Well, you are in the right place. Because in this post on “is personal loan interest tax deductible?” I am exactly answering that. So, stick here.
Let’s start by finding out whether personal loans are tax deductible or not/
Are Personal Loans Tax Deductible?
No, personal loans are not tax deductible. Because they are mostly for your personal expenses and do not fit under any tax deduction rule.
Though personal loans are not tax deductible, they won’t generally affect your taxes either. Because you have to return the money you get from a personal loan. As a result, they are never considered as your earnings. So, the loan amount won’t be added to your taxable income in the first place.
But what about the interest on personal loans?
Is Personal Loan Interest Tax Deductible?
Generally, personal loan interest is not tax deductible. However, there are some exceptions.
When you take out a personal loan you normally use it for personal expenses like purchasing a car, paying for an emergency, or getting rid of high-interest debts, etc. As a result, the interest you pay on these loans is not deductible. The same goes for credit cards.
However, there are some exceptions. In particular, there are 3 situations where you can deduct personal loan interest. They are
1. Self-Employment Expenses or Business Expenses
If you spend the money from a personal loan for your self-employment expenses or business expenses then you will be eligible for a tax deduction on the interest payment only. These expenses might be regular business expenses or paying for home office expenses.
However, to be eligible for it you must keep track of the expenses and they have to be real. You know what I mean. But there is a catch. Most lenders won’t let you use personal loan money on your business.
Nevertheless, if you somehow manage to convince your lender then you can enjoy interest deductions. Moreover, you can divide the money into two and use it for business expenses as well as personal expenses. In that situation, you must keep track and get interest tax deductions for the business expense only.
2. Student Loan Expenditure
Most of us either get a federal or a private student loan for paying higher study costs. However, a higher study can be pretty expensive and your student loan can come in short. On the other hand, many students take out personal debt to consolidate student loans.
In those situations, your personal loan interest debt is tax deductible. But it must be qualified education expenses. Moreover, if you are married and file separately then a student loan interest deduction is not applicable to you.
3. Investment Interest
In case you take personal loans to invest and it happens to be a taxable investment then you are in luck. Because certain bonds and assets get tax deductions on the interest.
However, you won’t be eligible for it if you invest in tax-exempt bonds.
Now we know that you can deduct personal loan interest in certain situations. However, if you need money for business expenses and your lender does not allow you to use personal loan money. Then is the interest paid on business loans tax deductible?
Is Interest On A Business Loan Tax Deductible?
Yes, business loan interest is tax deductible if you write off the interest portion as business expenses.
Business loans are not considered taxable income. Because you can’t keep the money in one way or another it has to be paid back. So, business loan payments are not tax deductible.
However, unlike the loan payment, the interest paid on a business loan is additional money you pay for taking the loan which can be considered a business expense. So, you can write off the interest on a business loan and deduct interest tax.
Are Personal Loans For Home Improvements Tax Deductible?
No, personal loans for home improvements are not tax deductible in any situation.
Governments provide tax-deductible rules for certain welfare schemes like student loans, investments or business. These help progress and keep the economy growing.
However, your personal loan for home improvements does not do any greater good. As a result, there are no tax deductions on these kinds of loans. You can not even deduct the interest.
On the other hand, these loans are not your taxable income. So, they won’t affect your taxes.
Now we know the interest paid on which type of loan is not tax deductible. So, which are deductible?
What Interest Is Tax Deductible?
The interest paid on the following loans is tax deductible.
- Mortgage Interest payments
- Second mortgage interest payments
- Qualified student loans both private student loans and federal student loans
- Eligible taxable investments
- Business loans
How To Report Interest Income From A Personal Loan?
You have to report interest income from a personal loan on Form 1099-INT.
The interest income you receive from a personal loan is treated like the interest you receive from banks or savings accounts. So, you have to report the interest income by January 31 in Form 1099-INT.
The interest you pay on personal loans is not considered as deductible unless it falls under the exceptions.
Lastly, take personal loans responsibly and if you need any help regarding tax on interest or loans then please consult with a tax attorney.