Personal Loans and Credit

Can personal loans be tax deductible?

Most of the time, no, but there are some exceptions
By Troy Segal
Updated April 22, 2021
Reviewed by Thomas Brock

The interest you pay on the personal loans is not tax deductible. If you borrow to buy the car you want for your personal use , or to pay for other personal expenses, the interest you pay on the loan will not affect the tax burden. Similarly, interest paid to credit cards is also generally not tax-deductible.
The most important takeaways

The interest paid on personal loans as well as car loans, and credit cards are generally not tax deductible.
However, you may be eligible to claim the interest that you've earned when you make your tax filings in the event that you obtain a loan or accrue credit card charges to fund business expenses.
The interest earned on eligible student loans that serve to cover eligible educational expenses, is tax deductible.

Debt Expenses That Can Be Reimbursed

While personal loans aren't tax-deductible but other types such loans are. The interest paid on student loans as well as business loans often can be included in your annual tax return and reduce your tax-deductible income for the year.

However, certain conditions must be met in order to qualify to be eligible for the deductions mentioned above. Mortgage interest, for example is only deductable in the event that the loan was used to finance an investment in a residence as the primary. You could be eligible to claim a tax credit--which directs reduction of the amount tax that you must pay instead of your taxable income mortgage interest if you've been issued a mortgage credit certificate through a government program for low-income housing.1

You shouldn't need a tax break to afford a personal loan. If you're considering applying for personal loan but aren't certain what amount you'll be able pay back, you should look into the personal loan calculator to figure out the amount you're able to afford every month.
Exclusivity to the Rule

If you make use of an individual loan or credit card finance business expenses , in addition to personal expenditures, you may be eligible to claim interest on these expenses on your taxes. The borrower must also be the person legally responsible for the loan and be able of identifying what portion of the interest that you pay is due to legitimate business expenses.2

Similar to this, if you make a personal loan in order to buy a vehicle with a purpose for business, then some or even all the amount of interest you pay on the loan is tax deductible. If the vehicle is used solely for businesspurposes, the entire interest is tax deductible. If you are using it to serve both business and personal reasons, then you are able to take deductions for loan interest proportionate to the length of time you use the vehicle to conduct business purposes. If you devote 60% of your driving time in business-related pursuits, for example, then 60% of your annual interest is deductible.2

This exemption also applies to using personal loan to invest in the form of an S company (S subchapter) partnership, Limited Liability Corporation (LLC). But, the rules that govern the deductions are a bit hazy and it is recommended to consult a qualified tax professional to determine what deductions you are able to take off.2

In order for the interest paid on a loan to be tax-deductible and tax-deductible, the loan must be taken out by the individual either their spouse or by a person who is a dependent.
Student Loans

Interest in student loans (along with loan origination charges and any capitalized interest) is tax deductible, providing the borrower's income is lower than a specific amount. It is the Internal Revenue Service (IRS) stipulates that the individual's modified adjusted gross income (MAGI) must not exceed $85,000 (or $170,000 in the case of filing a joint return) for tax year 2019.3

The deduction can lower the amount of income subject to federal tax by as much as $2,500.3 This amount is categorized as an adjustment to income . It can be claimed even when an individual taxpayer takes deductions (as as opposed to making the usual deduction).

The interest rate must be on the basis of a "qualified" students loan that is which is used to fund qualified expenses related to higher education. This means that the loan covers the costs for going to an educational institution that is eligible and can include tuition/fees, charges for student activity, books as well as other expenses considered necessary according to the IRS.4 An educational institution that qualifies is any university, college or vocational institution which is able to take part in the financial aid program that is administered through the U.S. Department of Education. It also includes graduate school.
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