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Personal Loans and Loans

Can Personal Loans be tax-deductible?

Usually the answer is no, but there are exceptions

By Troy Segal

Updated April 22nd 2021

Review by Thomas Brock

Interest paid in the personal loans is not tax deductible. If you use the money to purchase a car for personal use or to cover other personal expenses, the interest you pay on the loan doesn’t reduce your tax liability. In the same way, interest for credit card debts are typically not tax deductible.

Important Takeaways

Interest paid on personal loans or car loans and credit cards is generally not tax deductible.

However, you may be eligible to claim the interest that you’ve earned when you file your taxes if you take out an loan or accumulate credit card charges to finance business expenses.

Interest on qualified student loans, which can be used to fund certain educational expenses, can be tax deductible.

Debt-related expenses that can be Deducted

While personal loans aren’t tax-deductible but other types such loans are. Interest paid on mortgages, student loans as well as business loans typically can be deducted on your annual taxes which reduces your tax-deductible income during the year.

However, certain conditions must be met in order to qualify for these deductions. Mortgage interest, for example is only deductable in the event that the loan was used to pay for the purchase of a residence as the primary. It is possible take advantage of a tax credit—which will directly lower the tax you have to pay rather than your taxable income—for mortgage interest if you were granted a mortgage credit certificate through a government program for low-income housing.1

There is no need for the aid of a tax deduction to pay for a personal loan. If you’re thinking of taking out a personal loan but aren’t sure of the amount you’ll be able repay, you must look into an individual loan calculator to calculate what you can afford each month.

Exemptions to the Rule

If you use an individual loan or credit card in order to fund the business expense, as well as personal expenditures, you may be eligible to claim interest on these costs on your tax returns. It is your responsibility to be the person legally responsible for the loan and be able to determine what portion of the interest paid is attributable in part to business expenses.2

Similar to this, if you make a personal loan in order to buy a car which is used for business, then some or even all the amount of interest on the loan is tax deductible. If the vehicle is used solely for business, the entire interest is deductible. If you use it for both business and personal purposes, then you can reduce loan interest in proportion to the length of time you use the vehicle to conduct business purposes. If you spend 60 percent of your driving time working for a business such as business, then 60% of your annual interest is deductible.2

The same exception applies to the use of a personal loan to purchase the form of an S company (S subchapter), partnership, or limited liability corporation (LLC). However, the rules for these deductions can be complicated 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 have been taken out by the person who took it out or their spouse, or by a person who is a dependent.

Student Loans

The interest of loans for students loans (along together with loan origination fees as well as any capitalized interest) is tax deductible, as long as the borrower’s earnings are lower than a specific amount. According to the Internal Revenue Service (IRS) states that an individual’s modified adjusted amount (MAGI) must be less than $85,000 (or $170,000 in the case of filing a joint return) for tax year 2019.3

The deduction is able to reduce the amount of income that is subject to federal tax 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 loan must be the basis of a «qualified» students loan that is which is used to fund qualified higher education expenses. That means the loan is used to cover the costs of going to an educational institution that is eligible and could include tuition/fees student activity fees, books, and other expenses deemed essential according to the IRS.4 An educational institution that is eligible is any college, university or vocational school that is eligible to participate in the financial aid program run through the U.S. Department of Education. Also, it includes graduate schools.