If you have a personal loan or are thinking of applying for the same, there will be a plethora of questions that will come in your mind especially about taxes. After all, other loans like student loans, business loans, house loans, etc can have tax implications. How will this type of loan impact your annual tax filing with the IRS?
Well, the answer to this is short and basic. You should know the fact that if you are applying for a personal loan, it will not affect your tax. Nevertheless, there are situations wherein your loan interest payments are deductible or the loan you have taken can be filed as an income. But the same is not very common, says the professionals. To gather more information, here are some details we have gathered on tax payday loans and personal loans.
Are personal loans counted as taxable income?
The answer so the question for most of the cases is no. Personal loans are not known as income because you have to repay it. There is only one exception if the loan is forgiven and the lender offers a COD (cancellation of debt).
Now, you may be wondering what is COD? Well, it means you are no longer liable to repay the interest or principal of the loan you have taken. One thing you need to keep in mind is any money you get from a cancellation of debt is known as income and can be taxed. Now this is where you will most certainly receive a 1099-C form from the loan lender.
The same has to be submitted while you file taxes in the coming year. For example, let’s assume you’ve taken a loan for $12,000. Now by the time you pay back $9,000 the debt is forgiven or cancelled. Now this means you still have $3,000 remaining from the original personal loan which still has to be paid. Now this $3,000 will now surely be known to be an income by the government. The next year you will owe taxes for the same.You will also be required to submit a 1099-C with your tax return.
Are repayments and interest paid on personal loans tax deductible?
The answer to the same is no. Interest paid and repayments are surely not tax deductible. The same is applicable only if you make use of the personal loan for uses like debt consolidation, home improvements, etc. Nevertheless, if you make use of the money for business related purposes, there might be chances you may have to deduct some or all of the interest paid.
Below mentioned are some of the scenarios where the interest is deducted.
- Business expenses: Business related costs like office tools, rent, furniture, travel, etc can be eligible. However, you have to be prepared to submit a proper report of what portion of the interest paid on the personal loan went towards business expenses during the income tax filing.
- Vehicle business purposes: In case the vehicle is used only for business, then most likely all of the interest might be deductible. In case the vehicle is used half personal/half business, then half of the interest may be deductible.
It is your responsibility to be prepared and be aware
By having a clear picture on how your present or future personal loan could affect your taxes, you will be more clear when the taxes roll around.
If you would like to gather more information about the same or “can I get a payday loan with a tax return“, please contact your lender or a tax professional.