Aug 29, 2024
Put simply, no, personal loans are usually not taxable as income. Discover® can’t give you tax advice; consult with a tax professional about your specific situation. We can offer basic information about personal loans and tax obligations.
Generally, personal loan borrowers do not owe taxes on a personal loan unless that loan is forgiven or cancelled before paid back in full. That is because while the IRS usually requires taxes to be paid on money you receive, when you take a personal loan, the loan amount is usually not considered to be earned income.
Why? Because the funds you get from personal loans are temporary, and once you’ve paid the loan back, you haven’t grown your wealth or income.
Note that while your personal loan won’t be taxed as income, your interest payments probably wouldn’t be considered a deductible expense as they might be case with a mortgage or home equity loan.
It’s always wise to be up-to-date on all related tax implications of a personal loan. Knowing the key differences between a loan and income could help clarify any confusion when doing your taxes.
The IRS states that when you borrow money — be it from a bank, a peer-to-peer lender, or a friend — it is considered debt if you are obligated to pay it back. And, generally, that debt doesn’t become taxable unless it is discharged (canceled or forgiven). If that debt is discharged, you may owe taxes on the amount you don’t pay back.
Loans that are not taxed as income include:
Examples of taxable income include:
If your tax advisor says that you’re obligated to report the taxable amount on canceled or forgiven debt, you would do so on the U.S. Individual Income Tax Return Form 1040.
There are, however, exceptions and exclusions outlined by the IRS. These may include debt that was cancelled as a gift or inheritance. Beyond that, you may be able to exclude debt from your income if canceled due to bankruptcy or if you are insolvent.
If you have a major expense to cover, or are looking to consolidate debt, a personal loan isn’t likely to complicate your taxable income during tax time. If you have back taxes to pay, a personal loan could help too.
Before you apply for a personal loan, ask yourself a few questions and consider important factors like the trustworthiness of the provider and the terms they offer, such as origination fees, annual percentage rate (APR), and whether there are any prepayment penalties.
A personal loan may help you reduce financial stress. 81% of surveyed customers told us taking out a Discover personal loan to consolidate debt reduced their stress.* And feeling less stressed when thinking about preparing taxes can be a good thing.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
*ABOUT SURVEY
All figures are from an online customer survey conducted September 14 to October 3, 2023. A total of 1,191 Discover personal loan customers were interviewed about their most recent Discover personal loan with 550 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2023 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.
