Are personal loans taxable and considered income?
Personal loans can be used to cover almost any type of expense and are generally not considered taxable income unless the loan is forgiven. If your personal loan is cancelled, the money you borrowed becomes Debt Cancellation Income (COD). You must report COD income when you file taxes for the year the loan was forgiven.
What is taxable income?
Taxable income generally includes all wages, salaries, freelance earnings, tips, and bonuses that a person brings in in a given year.
Some income is not taxable, including:
- Compensation for accidents and bodily injury
- Federal tax returns
- Money gifts
- Veterans and Welfare Benefits
A forgiven personal loan amount is money that the taxpayer has received and never repaid. Therefore, it can be considered a source of income and is often taxable. Generally, you will have to pay taxes on a forgiven personal loan, unless the loan was delivered as a gift from a private lender.
When are personal loans considered taxable income?
Income is classified by the IRS as money you earn, whether through work or investments. A personal loan must be repaid and cannot be considered income unless your debt is forgiven.
If you don’t intend to request debt forgiveness for your personal loan, you don’t have to worry about reporting it on your income taxes. If you’ve forgiven a debt, it’s important to understand how it could impact your taxes this year.
Debt Cancellation Income (COD)
If you’re having trouble paying an overdue debt, there are things you can do to get that debt forgiven. These options include negotiating with the lender, using debt settlement programs, and filing for bankruptcy.
If the lender agrees to cancel your debt, they will issue a COD and send you a Form 1099-C. You are required to report the canceled amount on this form and submit it to the IRS when you file your taxes.
Exceptions to the COD Income Rule
You do not have to report the forgiven loan amount as income in certain situations. If the amount is remitted as a gift from a private lender, or if the debt is remitted in the lender’s will, the amount does not have to be reported as income.
Additionally, taxpayers do not have to pay tax on canceled mortgage debt up to $750,000 due to the mortgage debt relief law passed during the Great Recession. The Consolidated Appropriations Act of 2020 extended these tax holidays for canceled mortgages through 2025 in light of the COVID 19 pandemic.
Are interest payments on personal loans tax deductible?
A tax-deductible expense is money a taxpayer can subtract from their overall gross income to reduce their reported income and therefore the taxes they have to pay. Personal loans, unlike other types of loans, are generally not tax deductible.
Interest payments on student loans, mortgages, and business loans can be claimed as tax deductions. However, interest payments on personal loans are only tax deductible under certain circumstances. If you can prove that a personal loan was used to pay business expenses, for example, interest payments for that loan may be tax deductible.
The bottom line
If you took out a personal loan last year and aren’t sure how it will affect your taxes, ask yourself if the debt has been forgiven. If your personal loan was canceled and not made as a gift by a private lender, you must report the outstanding balance as income for that year using a Form 1099-C provided by the lender.
If you’re having trouble repaying a personal loan and want to try having your debt forgiven, there are resources available to help you understand how to negotiate with lenders and work with debt relief companies.
For more information and resources on how to file your taxes, see Bankrate’s tax resources page.