Personal loans and taxes: don’t let this “nasty surprise” happen to you
take out a Personal loan may make you question the tax implications that come with such a financial effort. But it turns out there’s probably no need to worry about what that means when April 18 rolls around. Here’s what you need to know about the tax implications of personal loans.
Is a personal loan taxable?
There aren’t many tax implications when taking out a personal loan because these types of loans aren’t considered taxable income, says Ted Rossman, senior industry analyst at Bankrate. And because they’re not considered income, you don’t have to report them on your income taxes.
That said, there are times when a personal loan can result in a tax bill for you — like when your debt is canceled or written off, says Matt Schulz, chief credit industry analyst at LendingTree. “If your debt is canceled or discharged for less than the total amount you owe, the debt is considered canceled for the amount you do not have to pay,” said the IRS Explain. “Generally, if you have debt cancellation income because your debt is cancelled, forgiven, or discharged for less than the amount you owe, the amount of the canceled debt is taxable and you must report the canceled debt. on your tax return for the year of cancellation.
This, as Schulz explains, “can be an unpleasant surprise for the borrower.” But, to be fair, this is not a common occurrence, although debt collectors may offer a pardon in the event of bankruptcy or debt settlement agreement.
In other words, in general, your personal loan is considered a debt and as long as you’re on track to pay it off, you don’t have to worry about reporting it or paying taxes on it. It’s important to stay on top of payments, though, because “if part of your loan is canceled, you can find yourself in a very different situation, which can be costly,” says Kaitlin Walsh-Epstein, senior vice president of growth and commercialization at Laurel Road. However, the entire personal loan does not need to be declared. “If you owe $5,000 on your loan and they hand over $1,000 of the value, you’ll have to claim the $1,000 back on your taxes,” says certified financial planner Stephen Carrigg, director of investment analysis at Integrated Partners.
But how do you know exactly what you will need to declare your loan? Walsh-Epstein says a lender issues a cancellation of debt (COD) on the canceled amount. “This means you are no longer responsible for repaying your loan and you will receive a Form 109-C from your lender to submit with your tax return when you file and report the canceled amount,” Walsh explains. -Epstein.
Is the interest on a personal loan tax deductible?
The answer is usually no. Unless the proceeds of a personal loan are used for business expenses, eligible higher education expenses, or eligible taxable investments, interest on unsecured personal loans cannot be deducted as are mortgages and student loans.