Are Personal Loans Taxable as Income?

Article Summary:

Personal loans are not seen as taxable income by the IRS unless they were canceled (i.e., forgiven) by your lender. However, certain situations may still affect your taxes. Using personal loans for business expenses as well as the use of a gifted loan cancelation are worth discussing with your accountant.

Life has a way of throwing wrenches in our plans, and when that happens, it often comes at a cost. That’s why personal loans are so popular. They help fund the things we need…or maybe just want. When you get a loan, it clearly helps your bottom line. But is it taxable income?

According to the IRS, personal loans are, well, loans. Therefore, they are not considered to be taxable income. However, that doesn’t fully give you the full scope of what you should expect from personal loans come tax time. It’s time to take a closer look into the situation.

Are personal loans taxable?

For the most part, personal loans aren’t seen as taxable income. It’s not something that you’ve earned to keep—unlike regular wages or capital gains. Because it’s a loan, you still have to pay it back over time. However, there are certain tax implications that you should be aware of.

In rare situations, you could pay extra taxes because of a loan. In other situations, personal loans have the ability to lower taxes. It’s time to take a deep dive into tax breaks and the consequences of debt cancellation.

Are personal loan interest payments tax deductible?

Many types of loans have a tax deduction available to claim on interest. Loans that have deductible interest can include student loans, mortgage loans, as well as business loans. However, personal loans are not on that list. The interest payments you make on personal loans are not tax-deductible.

However, there is one minor issue that might make the interest partially tax-deductible. If you used your personal loans for a business expense, there may be a way to make the payments tax-deductible. It is usually a good idea to consult with a tax accountant before you claim a tax deduction from a personal loan.

When are personal loans considered to be taxable income?

IRS 1099-C form download
The IRS 1099-C form informs the IRS (and the debtor) of the cancellation of debt.

The only time a personal loan will become taxable income is if the loan itself is forgiven or canceled. When a loan is canceled, you no longer are legally obligated to pay it back. Your lender will send you a form 1099-C that lets you know how debt was canceled (i.e., how much income you earned).

Since you no longer have to pay the loan back, it’s like you were given free money, which the IRS views as taxable income. This is true, even if you just declared bankruptcy. You may have to pay taxes on the canceled debt.

Is there ever a situation where canceled personal loans won’t be taxed?

Yes! If your personal loan was canceled as a gift from the lender, then you will probably not be responsible for paying any taxes. Typically, the donor is responsible for paying the gift tax.  However, if the forgiven amount is more than $15,000 a year, your total will be counted against the lifetime exemption to the gift tax.

The general rule is that any gift is a taxable gift. However, there are multiple exceptions to this rule.

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

Will the IRS care if I use my personal loan for debt consolidation?

Your personal loan is your personal business, not the IRS’s. The only time that they may care is if they want to issue tax breaks for using a personal loan to kick-start a business. If you are worried about using your personal loan for tax purposes or similar, it may be time to call an accountant.

Do auto loans count as personal loans?

Auto loans generally behave the same way as personal loans when it comes to taxes. If you bought your car or truck for a business, then you might have a tax deduction. Canceled debt from auto loans will still be treated as income, complete with a 1099-C.

Does the IRS tax personal loans to friends and family?

For the most part, the answer is no. If you lend your child a very large sum of money, then you may have to fill out an IRS gift form. This shows the IRS that the money you “lent” is a gift. If you have a loan (or gift) that exceeds $15,000 for your kids (it rises to $16,000 in 2022), it’s important to keep some kind of record about it.

Gift forms are good if you have a gift that you don’t expect to give back, though it may still count against your lifetime gift exception. If you want to have a loan that’s IRS-official, then all you need to do is write down the loan plus interest, and keep it in a file for tax time.

Personal loans and taxes

Are you ready to take out a personal loan? The good news is that it won’t count against you when tax time arrives in most cases. However, what you use your personal loan for could change the tax deductions that you can claim. A loan taken for business expense reasons may give you additional deductions, and canceled debt can be taxed.

No matter what your situation is, it’s good to look before you leap. Thankfully, Supermoney has the tools you need to get educated about personal loans and (maybe) even find the right loan for you. Check out our loans site today!

Key takeaways

Personal loans are usually not a concern when you’re doing your taxes, but there are exceptions. Here’s the scoop:

  • Money obtained from personal loans generally do not count as taxable income to the IRS.
  • However, if your loan payments are canceled, you may have to pay taxes on the “forgiven” debt, since it is now considered income.
  • If it’s a matter of a personal loan from parents to children, the IRS generally looks the other way as long as the sum is below the annual gift tax exclusion ($16,000 in 2022).
  • If you use a personal loan for a business expense, you might be able to deduct your interest payments. Talk to a CPA to determine if this is right for you.
Article Sources
  1. Frequently Asked Questions On Gift Taxes? – Internal Revenue Service
  2. Canceled Debt – Is It Taxable Or Not? – Internal Revenue Service
  3. Individual Assistance – Internal Revenue Service
  4. Will The IRS Care About Personal Loans To Kids? – TaxAct
  5. Taxable and Nontaxable Income – Internal Revenue Service