Do Personal Loans Affect My Taxes?

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If you are taking out a personal loan (or have already taken one out), you may be wondering if it will be considered taxable income. The good news is that the funds you have to repay – such as those from a personal loan – are usually not considered income and are therefore not subject to income tax.

However, if part or all of your loan is canceled, the amount disbursed may be subject to federal income taxes.

If you’re wondering if personal loans are taxable, here are some things to know:

Are personal loans treated as taxable income?

Generally, no – in most cases, you do not need to mention personal loan funds for your taxes. Unlike the sources of income you maintain (such as your salary or wages), the money you borrow on a personal loan is not considered income. Instead, this money is a debt that you will have to repay in full to the lender.

The only exception is if part or all of your loan is forgiven or canceled – for example, if you settle the debt or write it off due to bankruptcy. In this case, you may receive a Form 1099-C from the lender showing how much of the debt was canceled, which you will need to indicate on your tax return.

Learn more: Types of personal loans

What is taxable income?

Taxable income is essentially the money you earn and keep, which is used to determine the taxes you owe to the government. Common sources of taxable income include:

  • Salary
  • Wages
  • Remuneration from freelancers
  • Business profits
  • Tips
  • Committees
  • Bonuses
  • Return on investment

At the end of each year, you may receive tax returns from these sources of income – for example, you could receive a W-2 from your employer or a Form 1099 from an independent client.

These documents can help you calculate how much you owe in taxes or how much you should receive as a refund.

Suggestion: Utilizing tax deductions could help you reduce your taxable income, reduce your tax bill, and increase the size of your tax return – if you owe it.

What if you received a loan from a family member or friend?

If a friend or family member lends you money, it will usually not be considered taxable income. However, there may be tax consequences for the person lending you the money if he does not charge interest on the loan or if you do not repay the money.

Depending on the size of the loan, the IRS may consider the unpaid amount or unpaid interest as a gift – which means that the person who lent the money will have to file a gift tax form and pay taxes on the loan.

What is the annual gift tax exemption? If the loan is below a certain amount, no gift tax form is required – this is known as a gift tax exemption. The following are the exemption amounts for 2021 and 2022:

  • 2021: $ 15,000
  • 2022: $ 16,000

Gifts in excess of the annual exemption amount could be taxed at a rate of 18% to 40%, depending on how much money the donor earns. Also keep in mind that while the person giving the money usually pays the tax, the person receiving the money could be responsible for paying it if the donor does not.

The IRS also has some exceptions where gifts are not taxed, even if the value exceeds the annual gift tax exemption – including gifts:

  • Received for tuition or medical expenses
  • To a husband
  • In a political organization
  • In charities that meet the requirements

Checkout: Do I have to take out a personal loan to start a business?

Are personal loans tax deductible?

Unlike the interest on some loans (such as student loans), the interest paid on personal loans is generally not tax deductible unless you use the loan proceeds in certain ways. For example, you may be able to deduct this interest from your taxes if you use the funds exclusively for:

  • Specialized higher education expenditure
  • Business expenses
  • Taxable investments
Suggestion: Be sure to keep careful records of how you use the funds if you decide to take out a personal loan for one of these purposes. While you can use personal loan funds to cover multiple expenses, any interest you attempt to deduct must come from only one of these required expenses.

Also, keep in mind that while you can generally use a personal loan to cover almost any personal expenses, some personal loan lenders are limiting the ways in which you can use their loans. For example, you may not be able to get a personal loan for business or educational expenses from some lenders.

Before taking out a personal loan, it is important to think about how much it will cost you. This way, you can be prepared for any additional costs. You can calculate the amount you will pay for a loan using our personal loan computer below

Enter your loan details to calculate how much you could pay

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during the life of the loan.

Tax implications if your personal loan is forgiven or canceled

In some cases, lenders will forgive or cancel a debt if they are unable to collect payments or if you are negotiating a settlement for less than you owe. If you had a personal loan repaid, the amount you failed to pay could be considered income – meaning it would be taxable.

For example: Suppose you owe $ 20,000 on a personal loan that you can not repay in full and the collector is willing to accept $ 15,000 to settle the account.

The difference between what you owe and what you actually pay – $ 5,000 in this case – could be taxed. The lender can send you Form 1099-C which will show how many debts have been forgiven and you will need to submit this document with your tax return.

Exceptions to tax rules

As with most IRS guidelines, there are also some exceptions to the rules on debt that have been written off or canceled. For example, the IRS does not consider any of the following to be canceled taxable debts:

  • Amounts canceled as gifts or inheritances
  • Some certified student loans have been canceled after working in a specific field for a certain period of time
  • Some loan repayment or forgiveness programs are offered to help provide health services in specific areas
  • Amounts of canceled debt that would be deductible if you paid it
  • Certified purchase price discount given by the seller of a property to the buyer
  • Any amounts rejected by federal, private or educational student loans

Additionally, you may not need to include canceled debt in your gross income for tax purposes if your debt was:

  • It was annulled on the basis of the bankruptcy of Title 11
  • Canceled to a degree of insolvency
  • Cancellation of approved farm debt
  • Cancellation of an approved real estate debt
  • Cancellation of a principal residence debt repaid under an agreement entered into and proved in writing before 1 January 2026
Suggestion: If you are thinking of negotiating a settlement with a personal loan lender, it might be a good idea to discuss the situation with a lawyer who specializes in debt or bankruptcy first.

That way, you can take advantage of the pros and cons – including taxes you may have to pay – in advance.

Learn more: How does debt consolidation work?

When to Consider a Personal Loan

You can use a personal loan to cover almost any personal expense. For example, if you need to consolidate debt, pay for a medical procedure or cover an unexpected expense, a personal loan could be a useful option.

Remember: Personal loan funds are usually not considered taxable income unless part or all of the loan is forgiven or canceled.

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About the Author

Taylor Medina

Taylor Medina

Taylor Medine is a trusted authority on personal finance. Her work has been presented at Bankrate, Experian, The Balance, Business Insider, Credit Karma and others. He is also the author of The 60-Minute Money Plan, a self-published introduction to the budget guide for those who hate the budget.

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