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Can personal loans be tax deductible?

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

By Troy Segal

Updated April 22nd 2021

Reviewed by Thomas Brock

The interest you pay for the personal loans is not tax-deductible. If you use the money to purchase a car for private use or to cover other personal expenses The interest you pay on the loan doesn’t reduce your tax obligation. Similarly, interest paid on credit card balances are typically not tax deductible.

The most important takeaways

The interest charged on personal loans as well as car loans, and credit cards is typically not tax deductible.

But, you might be eligible to claim interest you’ve paid to file your taxes if you take out a loan or accumulate credit card charges to fund business expenses.

Interest on qualified student loans which serve to cover eligible educational expenses, is tax deductible.

The Debt Expenses that Can Be Deducted

While personal loans are not tax deductible however, other kinds of loans are. Interest paid on mortgages, student loans and business loans often can be taken out of your tax bill which reduces your tax-deductible income during the year.

However, certain criteria are required to be met to be eligible for these deductions. Mortgage interest, for example is only tax-deductible if the loan was used to pay for the purchase of a home as a primary residence. It is possible to claim a tax credit that directs reduction of the amount tax that you must pay instead of your tax-deductible income mortgage interest, if you were granted a mortgage credit certificate under a program of the government for people with low incomes housing.1

It is not necessary to get the aid of a tax deduction to pay for a personal loan. If you’re interested in applying for an individual loan but aren’t certain what amount you’ll be able repay, you ought to consider using a personal loan calculator to figure out how much you can pay each month.

Exclusivity to the Rule

If you take out the personal loan or credit card finance business expenses in addition to personal expenses, you might be eligible to claim interest on these costs on your tax returns. The borrower must also be the one legally responsible for the loan as well as be able to itemize what portion of the interest paid is attributable the legitimate company expenses.2

Similar to this, if you make an individual loan for the purchase of a vehicle with a purpose for business in mind, then a portion or even all the amount of interest paid on the loan is tax deductible. If the vehicle is used solely for business, then the whole interest can be deducted. If you use it for both business and personal purposes, you can deduct loan interest proportionate to the amount of time you utilize the vehicle to conduct business purposes. If you spend 60 percent of your driving time on business-related activities such as business, then 60% of your annual interest can be deductible.2

This exception also is applicable to the use of personal loan to purchase an S company (S subchapter) partnership, a limited liability company, or limited liability corporation (LLC). But, the rules that govern the deductions are a bit hazy and it is recommended to enlist the aid of a qualified tax professional to figure out what you can claim off.2

In order for the interest paid on a loan to be tax-deductible, the loan must be repaid by the individual either their spouse or any dependent.

Student Loans

Interest of students’ loans (along together with loan origination charges and any interest that is capitalized) is tax deductible, as long as the borrower’s earnings are less than a certain amount. The Internal Revenue Service (IRS) specifies that the individual’s modified adjusted gross earnings (MAGI) must be less than $85,000 (or $170,000 if filing a joint return) for the tax year 2019.3

The deduction can lower the amount of income that is subject to federal tax by as much as $2,500.3 The amount is classified as an adjustment to income and can be claimed even when the taxpayer itemsizes deductions (as as opposed to using the basic deduction).

The loan must be an “qualified” student loan which is which is used to fund qualified expenses related to higher education. This means the loan is used to cover the costs of attending an eligible educational institution and can 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 qualifies is any college, university or vocational school which is able to take part in the financial aid program run through the U.S. Department of Education. It also includes graduate school.