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Personal Loans and Lending

Can Personal Loans be tax-deductible?

The majority of the time, the answer is no, however there are exceptions

By Troy Segal

Updated April 22, 2021

Review by Thomas Brock

The interest paid in personal loans is not tax deductible. If you use the money to purchase a car for personal use or to cover other expenses that you incur The interest you pay on that loan does not reduce your tax obligation. The same is true for interest earned on credit card balances is generally not tax-deductible.

Important Takeaways

The interest paid on personal loans, car loans, and credit cards are generally not tax deductible.

But, you might be able to claim interest you’ve paid when you make your tax filings when you get a loan or accrue credit card fees to finance business expenses.

The interest earned on qualified student loans that are used to pay for eligible educational expenses, is tax deductible.

Debt Expenses That Can Be deducted

Although personal loans aren’t tax-deductible but other types of loans are. The interest paid on mortgages, student loans and business loans typically can be deducted on your annual taxes, effectively reducing your taxable income for the year.

However, certain criteria are required to be met to be eligible to be eligible for the deductions mentioned above. Mortgage interest, for example, is only deductible in the event that the loan was made to fund to purchase a residence as the primary. You could be eligible take advantage of a tax credit–which directly reduces the amount of tax you owe instead of your taxable income mortgage interest, if you were given a mortgage credit certification under a program of the government for low-income housing.1

You shouldn’t need a tax break to afford the cost of a personal loan. If you’re thinking of taking out personal loan but aren’t sure of the amount you’ll be able to repay, you must look into an individual loan calculator to calculate what you can afford each month.

Exclusivity to the Rule

If you take out a personal loan or credit card in order to pay for business expenses , in addition to personal expenses, you could be able to claim the interest you paid for those costs on your tax returns. The borrower must also be the individual legally responsible for the loan, and you must be able to itemize what portion of the interest that you pay is due the legitimate company expenses.2

In the same way, if you take an individual loan to purchase a car which is used for business, then some (or all) of the cost you pay on the loan can be tax-deductible. If you are using the vehicle exclusively for business purposes, then the whole interest can be deducted. If you are using it for both personal and business reasons, then you are able to reduce loan interest in proportion to the duration you use the vehicle for business. If you devote 60 percent of your driving time working for a business such as business, then 60% of your annual interest you pay is deductible.2

This exception also is applicable to the use of a personal loan to purchase the form of an S corporation (S subchapter) partnership, a limited liability company, or the limited liability company (LLC). But, the rules that govern these deductions can be complicated therefore it is advisable to consult an experienced tax professional who can figure out what you can claim off.2

In order for the interest paid on a loan to be tax deductible and tax-deductible, the loan must be repaid by the borrower or their spouse, or by a person who is a dependent.

Student Loans

Interest on students’ loans (along with loan origination fees and any interest that is capitalized) is tax deductible, provided that the borrower’s income falls below a certain level. According to the Internal Revenue Service (IRS) specifies that an individual’s modified adjusted gross earnings (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 can lower amounts of earnings that is subject to federal taxation by as much as $2,500.3 This amount is categorized as an adjustment to income . It can be claimed even if a taxpayer itemizes deductions (as as opposed to making the usual deduction).

The interest rate must be on a “qualified” student loan, which is one which is used to fund qualified higher education expenses. That means the loan covers the costs for going to an educational institution that is eligible and may include tuition/fees student activity fees, books, and other expenses deemed required according to the IRS.4 An educational institution that is eligible is any college, university or vocational institution that is eligible to participate in a financial aid program administered through the U.S. Department of Education. It also includes graduate school.