Personal Loans, Lending

Can Personal Loans be tax-deductible?

Usually the answer is not necessarily, but there are exceptions
By Troy Segal
Updated April 22 2021
Review by Thomas Brock

The interest you pay on the personal loans is not tax-deductible. If you borrow to buy an automobile for private use or to cover other expenses that you incur and you are paying interest on that loan does not reduce the tax burden. The same is true for interest earned on credit card balances is also generally not tax deductible.
Important Takeaways

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

Debt Expenses That Can Be Deducted

While personal loans aren't tax-deductible, other types of loans are. The interest paid on student loans as well as business loans are often included in your annual tax return which reduces your tax-deductible income for the year.

But, certain requirements must be met to qualify for these deductions. For instance, mortgage interest is only deductable in the event that the loan was taken out to finance an investment in a home as a primary residence. You could be eligible take advantage of a tax deduction that directs reduction of the amount tax you owe rather than your taxable income--for mortgage interest if you were issued a mortgage credit certificate through a government program for people with low incomes housing.1

There is no need for an exemption from taxes to get the cost of a personal loan. If you're interested in taking out an individual loan but aren't sure of the amount you'll be able pay back, you should think about using a personal loan calculator to calculate the amount you're able to afford every month.
Exceptions to the Rule

If you make use of a personal loan or credit card 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. The borrower must also be the individual legally responsible for the loan, and you must be able of identifying what portion of the interest you pay is attributed in part to business expenses.2

Similar to this, if you make an individual loan to purchase a vehicle that has a business use and you pay for it, some or even all the amount of interest paid on the loan is tax-deductible. If you are using the vehicle solely for businesspurposes, the entire interest is tax deductible. If you are using it to serve both business and personal purposes, then you can deduct loan interest proportionate to the duration you use the vehicle to conduct business purposes. If you devote 60 percent of your driving time on business-related activities, for example, then 60% of the annual interest you pay is deductible.2

The same exception is applicable to the use of personal loan to purchase one of the following: S corporation (S subchapter) partnership, Limited Liability Corporation (LLC). However, the rules governing the deductions are a bit hazy therefore it is advisable to enlist the aid of a qualified tax professional to calculate what you can take off.2

In order for the interest paid on a loan to be tax deductible in the first place, the loan must be repaid by the individual either their spouse or any dependent.
Student Loans

The interest of loans for students loans (along with loan origination fees and any capitalized interest) is tax-deductible, as long as the borrower's earnings are less than a certain amount. It is the Internal Revenue Service (IRS) specifies that the individual's modified adjusted gross earnings (MAGI) must be less than $85,000 (or $170,000 when filing a joint tax return) for the tax year 2019.3

The deduction can lower amounts of earnings that is subject to federal taxation by as much as $2,500.3 This amount is categorized as an adjustment to income . It is available even if the taxpayer itemsizes deductions (as instead of making the usual deduction).

The loan must be a "qualified" student loan which is used to pay for qualified expenses related to higher education. This means that the loan covers the costs for going to an educational institution that is eligible and may include tuition/fees books, fees for student activities as well as other expenses considered required according to the IRS.4 An educational institution that is eligible is any university, college, or vocational school that is eligible to participate in a financial aid program administered by the U.S. Department of Education. It also includes graduate school.
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