While the IRS almost always 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 a debt. And, generally, that debt does not become taxable unless it is forgiven. If that debt is forgiven, you may well owe taxes on the amount you’re no longer obligated to pay.
Put simply, you do not owe taxes on a personal loan unless that loan is forgiven or cancelled before you’ve paid it back in full.
As Zacks Investment Research points out, when you take a loan (personal loan, in this example) you’re not earning money. Loans are temporary and once you’ve paid them back with interest, you haven’t grown your wealth or income with that money.
Loans received that are not taxed as income typically are received in the form of:
- Personal loans for credit card consolidation or major purchases
- Mortgage loans to purchase personal real estate or investment property
- Student loans
Taxable income is most often received in the form of:
- 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. Exceptions include, for instance, debt that was cancelled as a gift. Beyond that, you may be able to exclude canceled debt from your income, such as bankruptcy or insolvency.
Personal loan providers such as Discover Personal Loans can help you navigate the process of applying for a personal loan.
When you apply for a personal loan, there are many things to consider such as the annual percentage rate (APR), if there are any origination fees or pre-payment penalties, and of course the trustworthiness of the personal loan provider.
Personal loans may be a good fit if you have a strong credit history and the ability to repay the loan within your budget over a period of 24 to 60 months, for example.
Now that we have made it clear that receiving a personal loan is not considered taxable income, is there any way to receive a deduction?
Read our recent article, “Are Personal Loans Tax Deductible?” to find out.