Are personal loans taxable?
Personal loans aren't considered income because they have to be repaid — unless the debt is forgiven
A personal loan can feel like income when you’re using the money to meet financial needs, such as buying replacement windows for your home or a new transmission for your car. Unlike income, however, you have to repay the money — with interest. So when it comes to the tax implications, personal loans aren't treated the same as income. Here’s what to expect come tax time.
- Personal loans are not taxable because they’re not considered income.
- If the lender forgives the loan or part of the loan, you may need to pay taxes on the canceled part of the debt.
- It’s always best to speak with a tax professional with questions about reporting income and your tax liability.
What is taxable income?
Taxable income is the portion of a person’s gross income that's subject to taxes. It's the amount of your income the IRS uses to calculate how much tax you owe to the federal government each year, and it includes both earned and unearned income.
Earned income is the money you earn from work, including the money your employer pays you. Unearned income is money you receive from sources other than an employer. This may include disability payments, unemployment benefits and capital gains.
Is a personal loan income?
As a general rule, personal loans aren't considered a form of income. A personal loan is a debt, or liability, not income — so it's not taxable.
A personal loan is a debt, and debts usually aren’t taxable.
An exception to the rule
A personal loan becomes income if the lender cancels, or forgives, the debt. For example, say you borrow $1,000 from a lender and promise to repay it, but you don’t. Over time, however, the lender may write off the debt, letting you off the hook for repayment.
When a lender does this, it’s called a cancellation of debt, or COD. If the amount of that debt is over $600, the lender will send you Form 1099-C. The debt is now considered income, and you’ll need to report it on your taxes.
“There are exceptions that may permit some taxpayers, in certain circumstances, to not include their canceled debt as income,” according to Logan Allec, a certified public accountant and the owner of tax relief company Choice Tax Relief.
He said the most common exception is for insolvency — if a taxpayer is insolvent (meaning their liabilities exceed their assets), their canceled debt is not taxable to the extent the taxpayer is insolvent. If a taxpayer has $5,000 in assets and $7,000 in liabilities, for example, they're insolvent. However, if $3,000 of those liabilities are forgiven, the taxpayer would include $1,000 of that canceled debt as income, Allec said.
Is personal loan interest tax deductible?
Many people pay a significant amount of money each year in interest charges on debt. That’s the fee you pay to borrow the funds. The interest on personal loans or credit cards is not tax deductible.
“Believe it or not, there was a time when all interest paid on personal loans — including credit cards — was deductible as an itemized deduction on one's tax return,” said Allec. The deduction for personal loan interest was completely eliminated in the 1991 tax year, he said.
There are exceptions, however, if you used the loan proceeds for your business, tuition or investments. “These kinds of expenses are generally tax deductible,” Allec said. “Note that there are limitations on those kinds of expenses as well, and it's important that you trace how the loan's proceeds were used with verifiable documentation.”
- Can you loan money to a family member tax-free?
The IRS requires you to charge a minimum interest rate on a loan to a family member. You can find the Applicable Federal Rates, published monthly, on the IRS website. You should also make sure there's a written agreement. There may be exceptions for loans of small amounts; to remain in tax compliance with the IRS, speak with a tax professional before lending money to a family member.
- What type of income is tax-free?
There are various types of income that are generally considered tax-free, such as:
- Child support payments
- Workers’ compensation benefits
- Life insurance proceeds
- Welfare payments
- Health care benefits
You should always check with a tax professional to be certain you don’t owe tax on a specific type of income.
- Do you have to pay taxes on a PPP loan?
Regardless of whether you paid back a Paycheck Protection Program loan or it was forgiven, the loan proceeds are not considered taxable income at the federal level. However, some states tax forgiven PPP loans, according to the nonprofit Tax Foundation.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- IRS, “What is Taxable and Nontaxable Income?” Accessed June 10, 2022.
- IRS, “Publication 525 (2021), Taxable and Nontaxable Income.” Accessed June 10, 2022.
- Tax Foundation, “Which States Are Taxing Forgiven PPP Loans?” Accessed June 16, 2022.
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