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Personal Loans

What Are the Tax Implications With Personal Loans?

A personal loan can cover many costs, including home improvements, medical bills, and credit card debt consolidation. Most lenders have few restrictions on personal loan use, which makes them a popular option with borrowers seeking flexibility. Depending on the lender, personal loans can be as small as $600 or as large as $100,000, and rates and fees also vary. 

Shopping around is a terrific way to find the ideal loan option for your situation. If you’re considering a personal loan, the proceeds are taxable in just one instance. Here’s everything you should know about the tax implications of personal loans. 

Are personal loans considered taxable income?

No; personal loans aren’t considered taxable income. As we mentioned, a personal loan can cover many costs, similar to your earned income. But your loan proceeds and your income fall into different categories when it comes to taxes. 

Because your lender requires you to repay a portion of your personal loan monthly over a set term, the IRS considers it a debt rather than income. 

Since the IRS classifies personal loan proceeds as a liability, you’re not taxed on the amount you borrow. So if you take out a $50,000 personal loan to renovate your kitchen, you don’t need to worry about reporting that amount when you file your taxes. 

Your loan proceeds won’t increase your taxable income, and the IRS will not penalize you or charge a fee if you fail to include them on your returns. 

What are the personal loan tax implications if my loan is canceled? 

Personal loans are considered debt and are generally not taxable. However, the one notable exception to this rule is debt cancellation

Let’s say you borrowed a $50,000 personal loan a few years ago and have paid it down considerably. You’re struggling to repay the full amount, but since you’ve made on-time, full payments up until this point, your lender cancels the last $5,000 you owe at your request. 

You must report that $5,000 on your taxes. The IRS classifies canceled debt as part of your gross income for the year.

In the rare instance that a portion of your personal loan is canceled, you’ll receive a 1099-C form from your lender if the canceled amount totals $600 or more. But if the canceled amount is less than $600, you still need to report it on your taxes. So in our example above, the lender would send a 1099-C for $5,000. Here’s a look at this form:

A sample 1099-C provided by the IRS

The IRS could penalize you if you fail to include canceled personal loan debt on your taxes, whether it’s $500, $5,000, or any other amount. If you don’t receive a 1099-C from your lender because the canceled debt doesn’t exceed the $600 threshold, just report the amount as income on your 1040 form.

Can I write off a personal loan on my taxes?

While interest on certain loans may be tax-deductible, personal loan interest is typically not. So you generally won’t get a tax break for the interest paid toward your personal loan each year as you might with a student loan or mortgage. 

But there are also a couple of unusual exceptions to this rule:

  1. You might be able to deduct your personal loan interest payments if you used your loan proceeds to cover higher education costs or business expenses. That said, most lenders don’t permit using personal loans for college or university tuition and fees. 
  2. Depending on your lender, you might be able to use your personal loan to pay for business-related costs. If that’s the case, you may be able to write off your interest payments as a business cost. (We recommend that you consult with a tax professional to confirm this exception applies.)

Should I report my personal loan on my taxes?

If you take out a personal loan, you generally won’t need to report that amount on your taxes. The IRS classifies it as debt, not income. So you don’t need to mention the $50,000 personal loan you borrowed to renovate your house when you file. In most cases, the IRS won’t penalize you if you don’t report it. 

But in rare instances, you may need to report your personal loan on your taxes

  1. If, for example, your lender cancels a portion of your debt, the amount canceled will count toward your gross income for the year. Your lender may send you a 1099-C detailing the canceled amount if it’s over $600, and you’ll need to file this form with your 1040. If the canceled debt is less than $600, you won’t receive a 1099-C, but you should still report the amount on your 1040 form. 
  2. You might also be able to deduct personal loan interest payments if you used your proceeds to cover business expenses. A tax professional can offer guidance on whether taking this deduction makes sense. In many cases, it may make more sense to take the standard deduction amount rather than itemizing deductions, but consult with an expert if you have questions. 

How do I know if I have to pay taxes on my personal loan? 

Most of the time, you won’t need to pay taxes on a personal loan, so you can borrow one without worrying about potential consequences from the IRS. The only time you might need to pay taxes on your personal loan is if any portion of your debt is canceled, discharged, or forgiven

So if your lender forgives a portion of your personal loan debt, that amount is taxable as ordinary income. Your lender will likely send you a 1099-C if the forgiven amount exceeds $600, and this form will serve as a reminder to report the amount forgiven on your taxes. 

But even if the forgiven amount is less than $600, you’ll still need to report it on your taxes. So be mindful of that if this unique situation applies to you.