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How Do Loans Affect Taxes?
It’s inevitable — tax time comes around every year. But what if you’ve recently had or currently have a personal installment loan? You’ll definitely want to consult your tax advisor about funds you have borrowed, but personal loans should not have much (if any) impact on your taxes.
Not taxable income
A personal loan means borrowing a lump sum of money to cover a life event or unexpected expense. The IRS considers income as money earned through wages, investments, inheritance, etc. While you are accepting loan funding as additional financial assistance, it is not deemed by the IRS as income because it’s a debt that must be repaid. If your personal loan is ever forgiven and you do not pay it back in full, the money is then classified as cancellation of debt (COD) income, which must be reported when you file your taxes that year.
Not tax deductible
Expenses that are tax deductible can be subtracted from your reported gross annual income. Interest on certain loans like student loans or mortgages qualify as tax deductible. Like the interest on credit card debt, the interest that you pay on personal loans is generally not tax deductible. Exceptions may be granted if you use the loan funds for one of the following:
• Qualifying business expenses
• Qualifying higher education expenses
• Certain taxable investments
Consult a tax advisor for the specific requirements you need to meet for those deductions.
A personal loan is a credit product you apply for and accept with the intention to pay back the amount you received, plus interest charges and/or fees. It neither qualifies as taxable income nor as tax deductible. As with all financial services, an expert can help you determine how a loan can fit into your budget. Lendmark’s team of loan advisors is here for you and can assist you in finding the right option for your situation. Just contact us today or find a Lendmark branch near you.