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Personal Loans and Loans
Can personal loans be tax deductible?
Most of the time, not necessarily, but there are some exceptions
By Troy Segal
Updated April 22 2021
Reviewed by Thomas Brock
Interest paid on personal loans is not tax deductible. If you borrow to buy the car you want for your personal use , or to pay for other expenses that you incur and you are paying interest on that loan doesn’t reduce your tax obligation. Similarly, interest paid for credit card debts is typically not tax deductible.
Key Takeaways
Interest paid on personal loans or car loans, and credit cards are generally not tax deductible.
However, you may be able to claim interest you’ve paid to make your tax filings when you get a loan or accrue credit card charges to finance business expenses.
The interest on qualified student loans, which serve to cover eligible educational expenses, is tax-deductible.
The Debt Expenses that Can Be Reimbursed
Although personal loans are not tax-deductible however, other kinds that are loans are. The interest you pay on mortgages, student loans as well as business loans often can be included in your annual tax return, effectively reducing your taxable income during the year.
But, certain requirements must be met to qualify for these deductions. For example, interest on mortgages is only tax-deductible in the event that the loan was taken out to pay for an investment in a home as a primary residence. You may be able to claim a tax deduction that directs reduction of the amount tax that you must pay instead of your taxable income mortgage interest if you were granted a mortgage credit certificate through a government program for those with low incomes housing.1
There is no need for the aid of a tax deduction to pay for a personal loan. If you’re considering taking out personal loan but don’t know the amount you’ll have to repay, you ought to look into an individual loan calculator to determine what you can afford each month.
Exclusivity to the Rule
If you use a personal loan or credit card in order to pay for business expenses in addition to personal expenditures, you may be eligible to claim interest you paid for those costs on your tax returns. The borrower must also be the individual legally responsible for the loan as well as be able to itemize the portion of the interest that you pay is due the legitimate company expenses.2
In the same way, if you take a personal loan in order to buy a vehicle that has a business use and you pay for it, some or even all the amount of interest you pay on the loan is tax deductible. If the vehicle is used exclusively for business purposes, then all of the interest is deductible. If you use the vehicle for both personal and business purposes, you can reduce loan interest proportionate to the time you use the vehicle to conduct business purposes. If you spend 60% of your driving time on business-related activities 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 invest in one of the following: S corporation (S subchapter) partnership, Limited Liability Corporation (LLC). However, the rules for these deductions can be complicated and it is recommended to consult an expert tax advisor to figure out what you can claim off.2
To allow the interest earned on a student loan to be tax deductible and tax-deductible, the loan must be repaid by the individual, their spouse, or any dependent.
Student Loans
Interest on loans for students loans (along along with loan origination charges and any interest that is capitalized) can be tax-deductible as long as the borrower’s earnings are below a certain level. It is the Internal Revenue Service (IRS) stipulates that an individual’s modified adjusted gross earnings (MAGI) must not exceed $85,000 (or $170,000 when filing a joint tax return) for the tax year 2019.3
The deduction can lower the amount of income subject to federal tax by as much as $2,500.3 This amount is categorized as an adjustment to income and is available even if the taxpayer itemsizes deductions (as instead of taking the standard deduction).
The interest rate must be on a «qualified» student loan which is which is used to fund qualified higher education expenses. That means the loan covers the costs for the tuition at an eligible educational institution and may include tuition/fees charges for student activity, books, and other expenses deemed necessary by the IRS.4 An educational institution that is eligible is any university, college, or vocational school that is able to participate in the financial aid program that is administered through the U.S. Department of Education. It also includes graduate school.
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