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Can personal loans be tax deductible?

Usually the answer is no, but there are exceptions
By Troy Segal
Updated April 22nd, 2021
Reviewed by Thomas Brock

The interest you pay for the personal loans is not tax-deductible. If you take out a loan to purchase a car for private use or to cover other expenses that you incur, the interest you pay on that loan does not reduce your tax obligation. Similarly, interest paid to credit cards are generally not tax deductible.
The most important takeaways

The interest charged on personal loans or car loans as well as credit cards are generally not tax deductible.
But, you might be able to claim interest you've paid when you file your taxes in the event that you obtain a loan or pay credit card fees to finance business expenses.
Interest on qualified student loans which are used to pay for eligible educational expenses, is tax-deductible.

Debt-related expenses that can be Deducted

While personal loans aren't tax-deductible however, other kinds such loans are. The interest you pay on mortgages, student loans, and business loans typically can be deducted on your annual taxes and reduce your tax-deductible income during 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 taken out to pay for to purchase a primary residence. You could be eligible to claim a tax credit--which directs reduction of the amount tax you have to pay instead of your tax-deductible income mortgage interest, if you were given a mortgage credit certification as part of a federal program to help people with low incomes housing.1

It is not necessary to get a tax break to afford a personal loan. If you're considering applying for an individual loan but don't know the amount you'll be able repay, you ought to look into the personal loan calculator to determine the amount you're able to afford each month.
Exemptions to the Rule

If you take out a personal loan or credit card pay for business expenses , in addition to personal expenses, you could be eligible to claim interest you paid for those expenses on your taxes. The borrower must also be the one legally responsible for the loan, and you must be able to determine the portion of the interest that you pay is due to legitimate business expenses.2

Similarly, if you use an individual loan to purchase a vehicle that has a business use in mind, then a portion or all of the interest you pay on the loan is tax-deductible. If you are using the vehicle exclusively for business purposes, then all of the interest can be deducted. If you are using it for both business and personal purposes, then you can reduce loan interest in proportion to the amount of time you utilize the vehicle to conduct business. If you devote 60% of your driving time in business-related pursuits for instance, 60% of your annual interest you pay is deductible.2

The same exception applies to the use of personal loan to invest in one of the following: S corporate (S subchapter), partnership, or Limited Liability Corporation (LLC). However, the rules governing these deductions can be complicated, so it is wise to enlist the aid of an experienced tax professional who can figure out what you can claim off.2

For interest on a student loan to be tax-deductible in the first place, the loan must be taken out by the borrower or their spouse, or any dependent.
Student Loans

The interest in student loans (along along with loan origination fees and any capitalized interest) is tax-deductible, as long as the borrower's earnings are below a certain level. According to the Internal Revenue Service (IRS) states that the individual's modified adjusted gross amount (MAGI) must not exceed $85,000 (or $170,000 if filing a joint return) for tax year 2019.3

The deduction is able to reduce amounts of earnings subject to federal taxation by as much as $2,500.3 The amount is classified as an adjustment to income . It is available even if an individual taxpayer takes deductions (as opposed to using the basic deduction).

The interest rate must be on an "qualified" students loan that is that is used to cover expenses for higher education. This means the loan will cover the cost of attending an eligible educational institution and may include tuition/fees charges for student activity, books and other costs deemed required according to the IRS.4 An educational institution that is eligible is any university, college, or vocational school that is able to participate in the financial aid program that is administered through the U.S. Department of Education. It also includes graduate school.
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