Are personal loans taxable? How personal loans affect your tax return

Personal loans can cover nearly any expense and are generally not considered taxable income unless the loan is forgiven. Understanding how a personal loan can affect your taxes in different circumstances can help you file an accurate tax return.

Are personal loans taxable income?

Taxable income includes:

• Salaries.
• Wages.
• Freelance earnings.
• Tips.
• Bonuses.
• Winnings.

A personal loan, on the other hand, is a form of debt that must be repaid. Because of this, it doesn’t qualify as taxable income. That’s true even if you used the proceeds for personal needs, such as covering an emergency expense.

Exception: Cancellation of debt (COD) income

If there’s ever a point where your loan gets fully or partially canceled, you’ll receive a1099-C tax form from your lender that issued the cancelation of debt. You’ll only get this if the lender cancels $600 or more of your personal loan.

If any part of your debt was canceled, you didn’t pay it back, which means it’s then considered income. At this point, the amount is considered cancellation of debt or COD income. You’ll be required to pay taxes, but only on the canceled amount.

However, if your debt was discharged as part of Chapter 7 or Chapter 13 bankruptcy, it is not subject to being taxed.

When you don’t have to report forgiven loan amount

In some situations, you do not have to report the forgiven loan amount as income. If the amount is forgiven as a gift from a private lender, or if the debt is forgiven in the lender’s will, the amount does not have to be reported as income. Otherwise, it must be included when filing your taxes.

In this instance, you’re not on the hook for the forgiven amount since a gift has its own tax requirements through estate and gift tax. This won’t impact your tax return unless more than $18,000 is forgiven.

What happens if you don’t report a 1099-C?

The IRS considered canceled debt income because you didn’t repay a loan you originally agreed to pay back. If you received a cancelation of debt from your personal loan lender through a 1099-C form, the IRS received a copy of that form, too. That means they will know if you fail to report that income, and you will typically have to pay a penalty.

Tax deductions and personal loans

A tax-deductible expense is money a taxpayer can subtract from their gross income to reduce their reported income and, therefore, the taxes they have to pay.

Interest payments on student loans, mortgages and business loans can be reported as tax deductions. However, personal loan interest payments only qualify as tax-deductible under certain circumstances.

Are personal loan payments tax deductible?

Personal loans’ tax deductions depend on how you use the money. You cannot deduct payments from your annual income for tax purposes when personal loans are used for personal needs, such as:

• Debt consolidation.
• Paying for an emergency expense.
• Covering a medical bill.

Is interest on a personal loan tax deductible?

If you borrow a personal loan and use any portion of it for business expenses, you can deduct the interest paid on that part of your personal loan.

Imagine you used any personal loan to cover office equipment or a vehicle you use only for your business. You could itemize those deductions and report the portion of the loan that went towards those expenses.

Other than that, personal loan payments can’t be deducted.

Do I have to report a personal loan on my taxes?

In most instances, you don’t need to report a personal loan on your taxes since it’s not considered income.

If any part of your loan gets canceled, you’ll need to report the amount canceled as income because it’s the amount you were given and didn’t get paid back.

However, if you used any of your loans for business expenses, you can note that in your itemized deductions on your tax return.

The bottom line

The IRS generally does not consider personal loans taxable, as these loans do not count as income. However, if you had a loan canceled, that may count as taxable income.

Tax laws change regularly, so you’ll want to consult a certified public accountant, a tax preparer or a tax advisor who is well-versed in the most recent updates.