Are Personal Loans Tax Deductible?

Interest paid on personal loans is not tax deductible. If you borrow to buy a car for personal use or to cover other personal expenses, the interest you pay on that loan does not reduce your tax liability. Similarly, interest paid on credit card balances is also generally not tax deductible.

Debt Expenses That Can Be Deducted

Though personal loans are not tax deductible, other types of loans are. Interest paid on mortgages, student loans, and business loans often can be deducted on your annual taxes, effectively reducing your taxable income for the year.

However, certain criteria must be met to qualify for the above deductions. Mortgage interest, for example, is only deductible if the loan was taken out to fund the purchase of a primary residence. You may be able to claim a tax credit—which directly reduces the amount of tax you owe rather than your taxable income—for mortgage interest if you were issued a mortgage credit certificate through a government program for low-income housing.

You shouldn't need a tax break to afford a personal loan. If you're interested in taking out a personal loan but aren't certain what amount you'll be able to repay, you ought to consider using a personal loan calculator to determine what you can afford each month.

Exceptions to the Rule

If you use a personal loan or credit card to finance business expenses in addition to personal expenditures, you may be able to claim the interest paid on those expenses on your taxes. You must be the person legally liable for the loan, and you must be able to itemize what portion of the interest paid is attributable to legitimate business expenses.

Similarly, if you use a personal loan to purchase a vehicle that has a business use, then some or all of the interest on the loan is tax deductible. If you use the vehicle solely for business, then all of the interest is deductible. If you use it for both personal and business purposes, then you can deduct loan interest proportionate to the amount of time you use the vehicle for business. If you spend 60% of your driving time on business-related activities, for example, then 60% of the annual interest is deductible.

This exception also applies to the use of a personal loan to invest in an S corporation (S subchapter), partnership, or limited liability corporation (LLC). However, the rules governing these deductions are complicated, so it is wise to enlist the aid of a qualified tax professional to calculate what you can take off.

Student Loans

Interest on student loans (along with loan origination fees and any capitalized interest) is tax deductible, providing the borrower’s income is below a certain level. The Internal Revenue Service (IRS) states that an individual’s modified adjusted gross income (MAGI) must be less than $85,000 (or $175,000 if filing a joint return) for tax year 2022.

The deduction can lower the amount of income subject to federal income tax by up to $2,500. The amount is classified as an adjustment to income and can be claimed even if a taxpayer itemizes deductions (as opposed to taking the standard deduction).

The interest must be on a “qualified” student loan, which is one used to pay for qualified higher education expenses. That means the loan covers the costs for attending an eligible educational institution and can include tuition/fees, student activity fees, books, and other expenses deemed necessary by the IRS. An eligible educational institution is any college, university, or vocational school that is eligible to participate in a financial aid program administered by the U.S. Department of Education. It also includes graduate school.

The Bottom Line

Personal loans can be a good way to fund your goals, but they don't qualify for tax benefits unless the money is used for very specific business expenses. If you are borrowing money for qualifying educational expenses, consider taking out a student loan instead.