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Can Personal Loans be tax-deductible?

Usually the answer is no, however there are some exceptions
By Troy Segal
Updated April 22 2021
Reviewed by Thomas Brock

Interest paid for individual loans is not tax-deductible. If you take out a loan to purchase a car for personal use or to cover other personal expenses The interest you pay on the loan does not reduce the tax burden. In the same way, interest to credit cards is also generally not tax-deductible.
The most important takeaways

The interest charged on personal loans or car loans as well as credit cards is typically not tax-deductible.
But, you might be eligible to claim interest that you've earned when you file your taxes in the event that you obtain a loan or accumulate credit card charges to fund business expenses.
The interest on qualified student loans which can be used to fund qualified educational expenses, is tax-deductible.

Debt-related expenses that can be deducted

Although personal loans are not tax-deductible but other types of loans are. Interest paid on mortgages, student loans as well as business loans often can be taken out of your tax bill which reduces your tax-deductible income for the year.

But, certain requirements must be met to qualify for these deductions. For instance, mortgage interest is only deductable when the loan was made to fund an investment in a home as a primary residence. You could be eligible get a tax credit--which directly reduces the amount of tax you owe rather than your taxable income--for mortgage interest, if you were given a mortgage credit certification under a program of the government for low-income housing.1

It is not necessary to get an exemption from taxes to get the cost of a personal loan. If you're interested in applying for a personal loan but aren't certain what amount you'll be able to pay back, you should think about using an individual loan calculator to calculate how much you can pay every month.
Exceptions to the Rule

If you make use of an individual loan or credit card fund business expenses , in addition to personal expenditures, you may be eligible to claim the interest you paid for those costs on your tax returns. It is your responsibility to be the one legally liable for the loan, and you must be able to itemize the percentage of interest that you pay is due to legitimate business expenses.2

Similarly, if you use an individual loan to purchase a car with a purpose for business and you pay for it, some or even all the amount of interest on the loan is tax-deductible. If the vehicle is used solely for business, then the whole interest can be deducted. If you are using it for both personal and business reasons, then you are able to take deductions for loan interest in proportion to the time you use the vehicle to conduct business purposes. If you devote 60% of your driving time in business-related pursuits such as business, then 60% of your annual interest is deductible.2

The same exception is applicable to the use of personal loan to invest in one of the following: S corporate (S subchapter), partnership, or the limited liability company (LLC). But, the rules that govern the deductions are a bit hazy, so it is wise to consult a qualified tax professional to 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 be taken out by the borrower, their spouse, or by a person who is a dependent.
Student Loans

Interest of student loans (along with loan origination fees as well as any capitalized interest) is tax-deductible, provided that the borrower's income falls lower than a specific amount. According to the Internal Revenue Service (IRS) stipulates that an individual's modified adjusted income (MAGI) must be less than $85,000 (or $170,000 when filing a joint tax return) for tax year 2019.3

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

The loan must be the basis of a "qualified" students loan which is used to pay for qualified expenses for higher education. This means that the loan will cover the cost of going to an educational institution that is eligible and could include tuition/fees books, fees for student activities, and other expenses deemed necessary by the IRS.4 An eligible educational institution is any university, college or vocational institution which is able to take part in the financial aid program run through the U.S. Department of Education. This also includes graduate schools.
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