Are Personal Loans Tax-Deductible?

Consolidating debt, covering an emergency, funding a side business: people take out personal loans for reasons that sound a lot like the reasons behind a mortgage or a student loan. The tax code doesn't see it that way. Personal loan interest is nondeductible personal interest, the same bucket as credit card interest, unless you can show where the money went.

When personal loan interest can be deductible

Unlike a mortgage or a federal student loan, a personal loan itself comes with no tax advantage, no matter how good a reason you had for taking it out.

Three uses can make some or all of the interest deductible, and each one depends on where the money went rather than what the loan is called: money spent on a business you run, qualified education expenses, or buying taxable investments.

None of the three is easy to qualify for. The business version only covers a trade or business you run, not costs for a job you hold. The education version requires that the loan was taken out solely for education expenses, which disqualifies most mixed-purpose borrowing outright. The investment version is an itemized deduction capped at your net investment income, so it does nothing for filers taking the standard deduction.

Read more >> When personal loan interest is tax-deductible: Conditions, limits, and exceptions

Are personal loans considered taxable income?

If you’re approved, the lender deposits the funds in your bank account. But the IRS doesn’t count borrowed money you must repay as income, and a personal loan doesn’t go on your return.

Forgiven debt is different. If a lender cancels or settles part of what you owe, the IRS generally treats the forgiven amount as income, because you got the use of money you never paid back. A lender that cancels $600 or more will usually send you Form 1099-C showing the amount.

What happens if the debt is forgiven or settled

Generally isn't always. Debt canceled in a bankruptcy case is excluded from income, and so is debt canceled while you were insolvent (meaning your debts were greater than everything you owned, measured right before the cancellation), up to the amount you were insolvent by. Neither exclusion happens on its own. You claim it on Form 982, which means the 1099-C that arrives in the mail isn't a tax bill.‍

Where to get help. Bankruptcy is a complex legal process where the details depend on your specific situation. Talk with a bankruptcy attorney or nonprofit credit counselor first. Legal aid may help free if you qualify by income.

Taxes don't have to cost you either. The IRS runs Free File for most filers and VITA, which offers help for people under certain income limits, people with disabilities, and limited-English speakers. TCE covers anyone 60 or older. Call 800-906-9887 to find a site, or call AARP Tax-Aide, which runs most TCE sites, at 888-227-7669. For anything more complicated, talk with a CPA or enrolled agent. Enrolled agents are licensed by the IRS and usually cost less.

Bottom line

A personal loan isn't income, the interest usually isn't deductible, and forgiven debt is the one place where real money can turn on how you file. For most borrowers, nothing on the tax return changes what the loan costs.

The rate does, and it's decided before you borrow, when a lender prices the loan off your credit. Building credit before you apply is the one lever still open. The Kikoff Credit Account reports your on-time payments to Equifax, Experian, and TransUnion, there's no credit check to sign up, and plans start at $5 a month.