When taking out a personal loan, it’s always wise to be completely up-to-date on all personal loan tax implications. While the IRS usually requires taxes to be paid on money you receive, knowing the key differences between a loan and income could help clarify any confusion when doing your taxes.
Loans vs. Income
The IRS states that when you borrow money — be it from a bank, a peer-to-peer lender or a friend — that’s considered debt if you are obliged to pay it back. And, generally, that debt does not become taxable unless it is discharged (canceled or forgiven). If that debt is discharged, you may well owe taxes on the amount you don’t pay back.
So, are personal loans taxable? Put simply, no, they’re usually not. You do not owe taxes on a personal loan unless that loan is forgiven or cancelled before you’ve paid it back in full. When you take a personal loan, the loan amount is not earned income. Loans are temporary and once you’ve paid them back with interest, you haven’t grown your wealth or income with that money. While your personal loan won’t be taxed as income, you probably won’t be able to deduct the loan interest like you could with a mortgage or home equity loan, but there can be exceptions.
Loans that are not taxed as income include:
- Personal loans for credit card consolidation or major purchases
- Mortgage loans to purchase personal real estate or investment property
- Student loans
Examples of taxable income include:
- Salary or bonus paid to you by your employer
- Investment income from stocks, bonds, mutual funds, or ETF’s
- Real estate rental income
More on Canceled Debt
If you’re obligated to report the taxable amount on cancelled 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 cancelled due to bankruptcy or if you are insolvent.
But if you have a major expense to cover, or are looking to consolidate debt, you needn’t worry about a personal loan coming back to bite you as taxable income during tax time. Personal loan providers such as Discover Personal Loans can help you navigate the process of applying for a personal loan.
More on Personal Loans
Before you apply for a personal loan, ask yourself a few questions and consider important factors such as 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 could be good way to reduce financial stress without impacting your taxes.
For more tips on managing money, check out eight facts about money that could improve your financial health.