Personal Loans, Credit

Are Personal Loans Tax Deductible?

The majority of the time, the answer is no, but there are some exceptions
By Troy Segal
Updated April 22, 2021
Review by Thomas Brock

Interest paid for individual loans is not tax deductible. If you use the money to purchase the car you want for your private use or to cover other personal expenses, the interest you pay on the loan does not reduce the tax burden. The same is true for interest earned to credit cards is generally not tax deductible.
Key Takeaways

The interest charged on personal loans, car loans and credit cards are generally not tax-deductible.
But, you might be eligible to claim the interest you've paid to file your taxes in the event that you obtain an loan or accrue credit card charges to fund business expenses.
Interest on eligible student loans, which can be used to fund eligible educational expenses, is tax-deductible.

Debt-related expenses that can be Reimbursed

While personal loans aren't tax-deductible however, other kinds that are loans are. The interest paid on student loans and business loans typically can be included in your annual tax return which reduces your tax-deductible income during the year.

But, certain requirements are required to be met to be eligible to be eligible for the deductions mentioned above. For example, interest on mortgages is only tax-deductible when the loan was taken out to fund to purchase a residence as the primary. You could be eligible get a tax credit--which directly reduces the amount of tax you have to pay instead of your taxable income mortgage interest if you were given a mortgage credit certification under a program of the government for those with low incomes housing.1

There is no need for an exemption from taxes to get a personal loan. If you're thinking of getting personal loan but aren't certain what amount you'll be able repay, you must look into an individual loan calculator to figure out the amount you're able to afford each month.
Exceptions to the Rule

If you take out the personal loan or credit card to finance business expenses , in addition to personal expenses, you might be eligible to claim interest paid on those costs on your tax returns. You must be the one legally responsible for the loan and be able to determine the portion of the interest paid is attributable to legitimate business expenses.2

Similarly, if you use a personal loan for the purchase of a car which is used for business and you pay for it, some or even all the amount of interest on the loan is tax-deductible. If the vehicle is used exclusively for business purposes, then all of the interest is deductible. If you use it for both personal and business purposes, then you can take deductions for loan interest in proportion to the length of duration you use the vehicle to conduct business. If you spend 60 percent of your time driving in business-related pursuits, for example, then 60% of the annual interest can be deductible.2

The same exception applies to using personal loan to purchase an S company (S subchapter), partnership, or Limited Liability Corporation (LLC). However, the rules governing the deductions are a bit hazy therefore it is advisable to consult an experienced tax professional who can calculate what you can take off.2

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

Interest on student loans (along together with loan origination fees as well as any interest that is capitalized) can be tax-deductible provided that the borrower's income falls less than a certain amount. According to the Internal Revenue Service (IRS) stipulates that an individual's modified adjusted gross income (MAGI) must not exceed $85,000 (or $170,000 when filing a joint tax return) for tax year 2019.3

The deduction can lower your income subject to federal tax by as much as $2,500.3 The amount is classified as an adjustment to income and can be claimed even when a taxpayer itemizes deductions (as opposed to taking the standard deduction).

The loan must be the basis of a "qualified" students loan which is that is used to cover expenses related to higher education. That means the loan covers the costs for attending an eligible educational institution and could include tuition/fees charges for student activity, books, and other expenses deemed required according to the IRS.4 An educational institution that qualifies is any university, college, or vocational school that is eligible to participate in the financial aid program run by the U.S. Department of Education. Also, it includes graduate schools.
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