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Can personal loans be tax deductible?

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

By Troy Segal

Updated April 22, 2021

Reviewed by Thomas Brock

The interest paid for the personal loans is not tax deductible. If you use the money to purchase an automobile for personal use or to cover other personal expenses The interest you pay on the loan will not affect the tax burden. In the same way, interest to credit cards is also generally not tax deductible.

The most important 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 when you make your tax filings if you take out a loan or pay credit card charges to fund business expenses.

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

Debt Expenses That Can Be Reimbursed

Though personal loans aren’t tax-deductible, other types such loans are. The interest paid on student loans and business loans are often included in your annual tax return and reduce your tax-deductible income during the year.

However, certain conditions must be met to qualify to be eligible for the deductions mentioned above. For instance, mortgage interest is only tax-deductible if the loan was made to finance to purchase a home as a primary residence. You may be able to claim a tax credit–which will directly lower the tax you have to pay instead of your tax-deductible income mortgage interest if you’ve been given a mortgage credit certification as part of a federal program to help 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 interested in taking out personal loan but aren’t certain what amount you’ll be able pay back, you should consider using a personal loan calculator to calculate what you can afford each month.

Exclusivity to the Rule

If you take out the personal loan or credit card in order to pay for business expenses , in addition to personal expenses, you could be eligible to claim interest you paid for those expenses in your tax return. The borrower must also be the individual legally responsible for the loan and be able to determine the percentage of interest paid is attributable the legitimate company expenses.2

Similarly, if you use an individual loan to purchase a car that has a business use in mind, then a portion (or all) of the cost on the loan is tax deductible. If the vehicle is used solely for businesspurposes, then the whole interest can be deducted. If you are using it to serve both business and personal purposes, you can take deductions for loan interest proportionate to the time you use the vehicle to conduct business purposes. If you spend 60 percent of your driving time in business-related pursuits such as business, then 60% of the annual interest is deductible.2

This exemption also applies to using personal loan to invest in an S corporation (S subchapter) partnership, a limited liability company, or limited liability corporation (LLC). However, the rules governing these deductions are complicated therefore it is advisable to seek the assistance of 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, the loan must be repaid by the person who took it out either their spouse or a dependent.

Student Loans

The interest of students’ loans (along along with loan origination charges and any interest that is capitalized) is tax-deductible, provided that the borrower’s income falls lower than a specific amount. According to the Internal Revenue Service (IRS) specifies that an individual’s modified adjusted gross earnings (MAGI) must not exceed $85,000 (or $170,000 if filing a joint return) for tax year 2019.3

The deduction could reduce the amount of income that is subject to federal income tax by up to $2,500.3 This amount is categorized as an adjustment of income and is available even if the taxpayer itemsizes deductions (as opposed to taking the standard deduction).

The loan must be a «qualified» students loan, which is one used to pay for qualified expenses related to higher education. This means that the loan will cover the cost of the tuition at an eligible educational institution and could include tuition/fees charges for student activity, books as well as other expenses considered necessary to be necessary by IRS.4 An educational institution that is eligible is any college, university, or vocational school which is able to take part in the financial aid program that is administered through the U.S. Department of Education. This also includes graduate schools.

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