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Can Personal Loans be tax-deductible?

The majority of the time, the answer is no, however there are exceptions
By Troy Segal
Updated April 22nd 2021
Review by Thomas Brock

Interest paid in individual loans is not tax-deductible. If you borrow to buy the car you want for your personal use or to cover other expenses that you incur, the interest you pay on the loan does not reduce your tax liability. In the same way, interest to credit cards is generally not tax-deductible.
Important Takeaways

The interest charged on personal loans as well as car loans, and credit cards are generally not tax deductible.
However, you may be able to claim interest that you've earned when you submit your tax returns when you get an loan or accumulate credit card charges to fund business expenses.
Interest on eligible student loans which serve to cover qualified educational expenses, is tax-deductible.

The Debt Expenses that Can Be deducted

Although personal loans are not tax deductible, other types that are loans are. The interest paid on student loans, and business loans often can be included in your annual tax return and reduce your tax-deductible income for the year.

But, certain requirements are required to be met to be eligible for these deductions. For example, interest on mortgages is only deductable in the event that the loan was used to finance to purchase a primary residence. You may be able take advantage of a tax credit that directly reduces the amount of tax you owe instead of your taxable income mortgage interest, if you were given a mortgage credit certification through a government program for those with low incomes housing.1

It is not necessary to get a tax break to afford a personal loan. If you're considering taking out personal loan but aren't sure of the amount you'll be able to repay, you must consider using an individual loan calculator to calculate how much you can pay every month.
Exemptions to the Rule

If you make use of an individual loan or credit card in order to pay for business expenses , in addition to personal expenses, you could be eligible to claim interest paid on those costs on your tax returns. You must be the individual legally responsible for the loan as well as be able to determine the percentage of interest you pay is attributed the legitimate company expenses.2

Similarly, if you use an individual loan for the purchase of a vehicle which is used for business, then some or even all the amount of interest on the loan is tax-deductible. If the vehicle is used exclusively for business purposes, then the whole interest can be deducted. If you use it to serve both business and personal reasons, then you are able to take deductions for loan interest proportionate to the length of time you use the vehicle to conduct business. If you spend 60% of your driving time on business-related activities for instance, 60% of your annual interest is deductible.2

This exemption also is applicable to the use of personal loan to purchase an S company (S subchapter), partnership, or the limited liability company (LLC). However, the rules governing the deductions are a bit hazy, so it is wise to consult an experienced tax professional who can figure out what you can claim off.2

To allow the interest earned on a student loan to be tax-deductible and tax-deductible, the loan must have been taken out by the person who took it out or their spouse, or a dependent.
Student Loans

The interest of students' loans (along together with loan origination fees and any interest that is capitalized) is tax-deductible, provided that the borrower's income falls less than a certain amount. The Internal Revenue Service (IRS) states that the individual's modified adjusted gross amount (MAGI) must be less than $85,000 (or $170,000 if filing a joint return) for tax year 2019.3

The deduction could reduce amounts of earnings that is subject to federal tax by as much as $2,500.3 This amount is categorized as an adjustment to income . It can be claimed even if a taxpayer itemizes deductions (as as opposed to using the basic deduction).

The interest rate must be on the basis of a "qualified" student loan, which is one used to pay for qualified expenses related to higher education. This means the loan is used to cover the costs of attending an eligible educational institution and could include tuition/fees books, fees for student activities, and other expenses deemed required according to the IRS.4 An eligible educational institution is any university, college or vocational school that is able to participate in a financial aid program administered through the U.S. Department of Education. This also includes graduate schools.
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