When it comes to personal loans, understanding the tax implications can be crucial for effective financial planning. In this comprehensive guide, we will explore whether personal loans are taxable, if forgiven loans are considered taxable income, and when you might need to report them on your tax return. If you have any mortgage service needs, don’t hesitate to call O1ne Mortgage at 213-732-3074.

Are Personal Loans Taxable?

Personal loans generally aren’t taxable because the money you receive isn’t considered income. Unlike wages or investment earnings, which you earn and keep, you need to repay what you borrow. As a result:

• You don’t report the money you borrow. The money you receive from a personal loan doesn’t need to be included on your personal tax return.
• The type of financial institution isn’t relevant. It doesn’t matter if you got the personal loan from a bank, credit union, peer-to-peer lender, or another financial institution.

However, loans from friends and family members might be different. If you borrow money from a friend or family member, the money won’t count as taxable income for you, but there could be tax implications for the lender.

Is a Forgiven Personal Loan Considered Taxable Income?

You may need to pay income taxes on a portion of a personal loan that’s canceled, forgiven, or discharged. For example, if you have a $2,500 outstanding balance on a personal loan and the creditor agrees to settle the account for $1,500, then you have $1,000 in canceled debt.

Canceled debt could be taxable income. Canceled or forgiven debt is generally considered income, even if part of the amount is from fees and interest. The lender will send you and the IRS a Form 1099-C with the canceled amount, which you can use to prepare and file your tax return.

There are a few exceptions. A forgiven personal loan doesn’t lead to taxable income if your debt is discharged during bankruptcy. Additionally, if you’re insolvent (you owe more money than your current assets) when your debt is forgiven, then part or all of the forgiven debt could be excluded from your gross income.

Are Personal Loan Payments Tax Deductible?

The personal loan payments you make are not tax deductible. The money you receive isn’t income, and repaying the principal balance won’t affect your taxes one way or the other. You won’t even need to include the loan or file any extra forms with your tax return.

However, even when you can’t deduct what you’re repaying toward the principal balance, there are a few situations when you can deduct the interest you pay:

• Business expenses: If you use the personal loan for your business, you might be able to deduct the interest as a business expense.
• Qualified educational expenses: You also might be able to deduct your interest payments if you use the entire loan to pay for qualified educational expenses for yourself, a spouse, or a dependent—or if you use the personal loan to refinance an existing student loan. In either case, the total student loan interest deduction is capped at $2,500 annually and may be lower depending on your income.
• Certain taxable investments: You might be able to deduct the interest as an itemizable deduction if you use the loan for investing in certain types of assets, such as eligible stocks and bonds. You can only deduct up to the amount of investment income you had for the year, but you can roll over additional amounts to offset future years’ investment income.

When to Report Personal Loans on Your Tax Return

Based on the various situations described above, you may need or want to report the personal loan on your tax return when:

• Part of your loan was canceled or forgiven
• You used the loan for business expenses
• You used the entire loan for educational expenses
• You used the loan to purchase taxable investments

In other situations, you generally don’t have to include your personal loan or loan payments in your tax return.

Compare Loan Options to Find a Good Rate

Shopping for a personal loan can help you find the lowest rates and terms, which is ideal regardless of whether you’ll be able to deduct your interest payments. Your credit score will often be a major factor, as personal loans are often unsecured. Experian can help you find personal loans matched to your unique credit profile without hurting your credit score.

Contact O1ne Mortgage for Your Mortgage Service Needs

If you have any questions or need assistance with your mortgage, O1ne Mortgage is here to help. Our team of experts is dedicated to providing you with the best service possible. Call us today at 213-732-3074 for any mortgage service needs. We look forward to working with you!