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Personal Loans and Loans

Are Personal Loans Tax Deductible?

Usually the answer is no, however there are some exceptions

By Troy Segal

Updated April 22nd, 2021

Review by Thomas Brock

Interest paid in individual loans is not tax-deductible. If you borrow to buy the car you want for your private use or to cover other expenses that you incur, the interest you pay on the loan does not reduce your tax liability. In the same way, interest on credit card balances is also generally not tax deductible.

Important Takeaways

Interest paid on personal loans as well as car loans as well as credit cards is generally not tax-deductible.

However, you may be eligible to claim the interest you’ve paid when you make your tax filings if you take out a loan or accrue credit card charges to finance business expenses.

The interest on qualified student loans which are used to pay for eligible educational expenses, is tax deductible.

Debt Expenses That Can Be Deducted

Though personal loans are not tax deductible, other types such loans are. The interest paid on student loans, and business loans are often included in your annual tax return and reduce your tax-deductible income during the year.

But, certain requirements must be met in order to qualify for the above deductions. For example, interest on mortgages, is only deductible if the loan was used to finance to purchase a residence as the primary. It is possible get a tax credit that will directly lower the tax you owe instead of your taxable income mortgage interest if you were issued a mortgage credit certificate under a program of the government for those with low incomes housing.1

You shouldn’t need the aid of a tax deduction to pay for a personal loan. If you’re interested in getting a personal loan but don’t know the amount you’ll have to pay back, you should think about using an individual loan calculator to figure out the amount you’re able to afford every month.

Exceptions to the Rule

If you make use of an individual loan or credit card in order to fund business expenses , in addition to personal expenditures, you may be able to claim the interest you paid for those costs on your tax returns. You must be the one legally liable for the loan as well as be able to determine the portion of the interest you pay is attributed to legitimate business expenses.2

In the same way, if you take a personal loan for the purchase of a vehicle with a purpose for business, then some or even all the amount of interest on the loan is tax-deductible. If you are using the vehicle solely for businesspurposes, then all of the interest is deductible. If you use the vehicle for both personal and business reasons, then you are able to reduce loan interest in proportion to the time you use the vehicle for business purposes. If you use 60 percent of your time driving working for a business such as business, then 60% of your annual interest you pay is deductible.2

This exemption also is applicable to the use of a personal loan to invest in the form of an S corporate (S subchapter), partnership, or the limited liability company (LLC). However, the rules for these deductions are complicated, so it is wise to seek the assistance of an expert tax advisor to calculate what you can take off.2

For interest on a student loan to be tax-deductible and tax-deductible, the loan must be taken out by the person who took it out, their spouse, or a dependent.

Student Loans

The interest in student loans (along with loan origination fees and any capitalized interest) can be tax-deductible providing the borrower’s income is less than a certain amount. The Internal Revenue Service (IRS) specifies that the individual’s modified adjusted gross amount (MAGI) must not exceed $85,000 (or $170,000 in the case of filing a joint return) for the tax year 2019.3

The deduction can lower your income that is subject to federal taxation by as much as $2,500.3 This amount is categorized as an adjustment to income . It can be claimed even if a taxpayer itemizes deductions (as instead of taking the standard deduction).

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

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