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Can personal loans be tax deductible?

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

The interest you pay on individual loans is not tax deductible. If you borrow to buy 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 liability. Similarly, interest paid to credit cards is also generally not tax deductible.
The most important takeaways

Interest paid on personal loans, car loans as well as credit cards are generally not tax-deductible.
However, you may be able to claim interest you've paid when you file your taxes in the event that you obtain an loan or accumulate credit card charges to fund business expenses.
The interest earned on qualified student loans, which are used to pay for qualified educational expenses, is tax deductible.

Debt Expenses That Can Be deducted

Though personal loans are not tax deductible but other types of loans are. The interest paid on mortgages, student loans as well as business loans often can be taken out of your tax bill and reduce your tax-deductible income for the year.

However, certain criteria are required to be met to be eligible for these deductions. Mortgage interest, for example is only deductable if the loan was used to pay for to purchase a home as a primary residence. It is possible to claim a tax credit that directs reduction of the amount tax you owe instead of your taxable 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 the cost of a personal loan. If you're thinking of taking out an individual loan but aren't sure of the amount you'll be able repay, you must look into the personal loan calculator to figure out how much you can pay each month.
Exceptions to the Rule

If you take out a personal loan or credit card to finance business expenses in addition to personal expenditures, you may be eligible to claim interest on these expenses on your taxes. It is your responsibility to be the person legally liable for the loan as well as be able of identifying the percentage of interest you pay is attributed the legitimate company expenses.2

Similar to this, if you make a personal loan for the purchase of a vehicle that has a business use, then some or all of the interest paid on the loan is tax deductible. If the vehicle is used solely for businesspurposes, the entire interest is deductible. If you are using it for both personal and business purposes, you can reduce loan interest in proportion to the duration you use the vehicle for business. If you spend 60 percent of your time driving in business-related pursuits, for example, then 60% of your annual interest is deductible.2

This exemption also applies to the use of a personal loan to invest in an S corporate (S subchapter) partnership, a limited liability company, or Limited Liability Corporation (LLC). However, the rules for these deductions can be complicated, so it is wise 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, the loan must be taken out by the person who took it out, their spouse, or a dependent.
Student Loans

The interest on students' loans (along with loan origination fees and any interest that is capitalized) can be tax-deductible providing the borrower's income is lower than a specific amount. It is the Internal Revenue Service (IRS) stipulates that an individual's modified adjusted gross amount (MAGI) must not exceed $85,000 (or $170,000 if filing a joint return) for the tax year 2019.3

The deduction can lower amounts of earnings that is subject to federal income tax by up to $2,500.3 The amount is classified as an adjustment of income and is available even if the taxpayer itemsizes deductions (as opposed to using the basic deduction).

The loan must be the basis of a "qualified" students loan that is that is used to cover expenses for higher education. This means the loan covers the costs for going to an educational institution that is eligible and can include tuition/fees, books, fees for student activities, and other expenses deemed essential according to the IRS.4 An educational institution that qualifies 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. This also includes graduate schools.
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