December 11, 2022

Do personal loans affect my taxes?

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

However, if part or all of your loan is forgiven, the amount released may be subject to federal income tax.

If you’re wondering if personal loans are taxable, here’s what you need to know:

Are personal loans considered taxable income?

Generally, no – in most cases, you don’t have to report personal loan funds on your taxes. Unlike sources of income that you keep (like your salary or wages), money borrowed with 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 canceled or waived – for example, if you settle the debt or have it erased by bankruptcy. In this case, you might get a Form 1099-C from the lender showing the amount of canceled debt, which you will need to report 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
  • Independent income
  • business income
  • Advice
  • Fees
  • Bonuses
  • Investment income

At the end of each year, you might receive tax slips from these income sources — for example, you might get a W-2 from your employer or a Form 1099 from a self-employed client.

These documents can help you determine how much you owe in taxes or how much you should get in reimbursement.

Point: Taking advantage of tax deductions could help reduce your taxable income, reduce your tax bill and increase the amount of your tax refund, if you qualify.

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

If a friend or family member lends you money, it will generally not be considered taxable income. However, there could be tax consequences for the person lending you money if they don’t charge interest on the loan or if you don’t repay the money.

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

What is the annual gift tax exclusion? If the loan is less than a certain amount, a gift tax form is not required – this is called the gift tax exclusion. Here are the exclusion amounts for 2021 and 2022:
  • 2021: $15,000
  • 2022: $16,000

Donations above the annual exclusion amount could be taxed at a rate of 18% to 40%, depending on the amount of money the donor earns. Also keep in mind that while the person giving the money usually pays the tax, the person receiving the funds might be liable to pay it if the donor does not.

The IRS also has a few exceptions where gifts are not taxable, even if the value exceeds the annual tax exclusion on gifts, including gifts:
  • Receipt for tuition or medical expenses
  • Has a spouse
  • Has a political organization
  • To qualifying charities

To verify: Should I take out a personal loan to start a business?

Are personal loans tax deductible?

Unlike interest on some loans (like student loans), interest paid on personal loans is generally not tax deductible unless you use the loan proceeds in a specific way. For example, you may be able to deduct this interest from your taxes if you use the funds only to:

  • Eligible graduate fees
  • Professional expenses
  • Taxable investments
Point: Be sure to keep accurate records of how you use the funds if you decide to take out a personal loan for any of these purposes. Although you can use personal loan funds to cover multiple expenses, any interest you’re trying to deduct must come from only one of those qualifying expenses.

Also, keep in mind that while you can usually use a personal loan to cover almost any personal expense, some personal lenders limit the ways you can use their loans. For example, you might not be able to get a personal loan for work or education expenses from some lenders.

Before obtaining a personal loan, it is important to consider how much this loan will cost you. This way you can be prepared for any additional expense. You can estimate how much you will pay for a loan using our personal loan calculator below

Enter your loan information to calculate how much you could pay

Full payment

Total interest

Monthly payment

With a

ready, you will pay

monthly and a total of

interest over the term of your loan. You will pay a total of

over the term of the loan.

Tax implications if your personal loan is waived or canceled

In some situations, lenders will write off or cancel a debt if they are unable to collect payments or if you negotiate a settlement for less than you owe. If you had a personal loan that was discharged, the amount you didn’t pay could be considered income, which means it will be subject to tax.

For example: Suppose you owe $20,000 on a personal loan that you are unable to repay in full, and the debt 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 taxable. The lender can send you Form 1099-C showing the amount of debt forgiven, and you will need to file this document with your tax return.

Exceptions to tax rules

As with most IRS guidelines, there are also exceptions to the rules regarding canceled or forgiven debt. For example, the IRS does not consider any of the following as canceled debt that would be subject to tax:

  • Amounts canceled as donations or inheritances
  • Some qualified student loans canceled after working in a certain field for a specific period of time
  • Some student loan repayment or forgiveness programs offered to help provide health services in specific areas
  • Amounts of canceled debt that would be deductible if you paid it
  • Allowable purchase price deduction granted by the seller of a property to the buyer
  • Any amount discharged from federal, private, or educational student loans

Also, you may not have to include the canceled debt in your gross income for tax purposes if your debt was:

  • Voided under Title 11 Bankruptcy
  • Canceled in case of insolvency
  • Cancellation of eligible farm debt
  • Cancellation of debt of a qualifying real estate business
  • Cancellation of a qualifying principal residence debt that is discharged subject to an arrangement entered into and evidenced in writing before January 1, 2026
Point: If you are considering negotiating a settlement with a personal lender, it may be a good idea to first discuss the situation with a debt or bankruptcy attorney.

This way you can consider the pros and cons – including any taxes you may have to pay – up front.

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 might be a useful option.

Keep in mind: Personal loan funds are generally not considered taxable income unless all or part of the loan is canceled or waived.

If you decide to take out a personal loan, be sure to shop around and review your options with as many lenders as possible to find the loan that’s right for you.

Credible makes it easy – you can compare your prequalified rates from multiple lenders in two minutes.

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About the Author

Taylor Medina

Taylor Medine is a credible authority on personal finance. His work has been featured on Bankrate, Experian, The Balance, Business Insider, Credit Karma, and more. She is also the author of The 60-Minute Money Plan, a self-published primer on budgeting for people who hate budgeting.

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