Are Personal Loans Taxable? Key Points to Know

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Are Personal Loans Taxable?

Personal loans are generally not taxable because the money you receive is not considered income. Unlike wages or investment earnings, which you earn and keep, you need to repay what you borrow. Therefore, you do not need to report the money you borrow on your personal tax return. This applies regardless of whether you got the loan from a bank, credit union, peer-to-peer lender, or another financial institution.

Is a Forgiven Personal Loan Considered Taxable Income?

If a portion of your personal loan is canceled, forgiven, or discharged, you may need to pay income taxes on that amount. For example, if you have a $2,500 outstanding balance and the creditor settles for $1,500, the $1,000 difference is considered canceled debt and could be taxable income. The lender will send you and the IRS a Form 1099-C with the canceled amount, which you can use to prepare your tax return. Exceptions include debt discharged during bankruptcy or if you are insolvent at the time of forgiveness.

Are Personal Loan Payments Tax Deductible?

Personal loan payments are not tax deductible. The money you receive is not income, and repaying the principal balance does not affect your taxes. However, there are specific situations where you can deduct the interest you pay on a personal loan, such as for business expenses, qualified educational expenses, or certain taxable investments.

Is Personal Loan Interest Tax Deductible?

You might be able to deduct the interest you pay on a personal loan if you use the loan for specific purposes:

• Business expenses: If the loan is used for your business, you might be able to deduct the interest as a business expense.
• Qualified educational expenses: You might be able to deduct interest payments if the loan is used for qualified educational expenses or to refinance an existing student loan. The total student loan interest deduction is capped at $2,500 annually and may be lower depending on your income.
• Certain taxable investments: You might be able to deduct the interest as an itemizable deduction if the loan is used for investing in certain types of assets, such as eligible stocks and bonds. You can only deduct up to the amount of investment income you had for the year, but you can roll over additional amounts to offset future years’ investment income.

When to Report Personal Loans on Your Tax Return

You may need to report the personal loan on your tax return in the following situations:

• Part of your loan was canceled or forgiven
• You used the loan for business expenses
• You used the entire loan for educational expenses
• You used the loan to purchase taxable investments

In other situations, you generally do not have to include your personal loan or loan payments in your tax return.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we are committed to helping you navigate your mortgage needs with ease. Whether you are looking for a new mortgage or need advice on managing your existing one, our team of experts is here to assist you. Call us today at 213-732-3074 for personalized service and the best mortgage solutions tailored to your needs.

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