- June 13, 2020
- Posted by: Ganeshcbani
- Category: Blog
If you’re in the middle of a tough financial patch, it might be a good time to consider borrowing money from a friend or family member. But before you do, be sure to ask yourself if any of those loans are tax deductible.
What are personal loans?
Personal loans are a form of borrowing where you borrow money from a lender, typically with the intent of paying back the loan with interest.
In most cases, personal loans are considered to be financial tools, not actual gifts. This means that you can generally deduct the interest payments you make on personal loans as part of your income.
There are a few important things to keep in mind when taking out personal loans:
- You may be able to deduct the interest paid on personal loans as itemized deductions on your federal tax return. You’ll need to keep track of the interest you pay and the total amount you borrow in order to calculate your deduction.
- Certain types of personal loans, such as those secured by your home or car, may not be eligible for a deduction. Additionally, if you take out a loan that exceeds your available credit limit, you may have to pay back more than the original amount borrowed in order to avoid defaulting on the loan.
- If you’re struggling to make payments on your personal loan, it may be wise to seek help from a professional financial adviser. A qualified professional can help you explore all of your options and find an appropriate repayment plan that’s right for you.
When are personal loans deductible?
When you take out a personal loan, the IRS may consider it to be a form of taxable income. However, there are some specific circumstances in which a personal loan can be forgiven or considered exempt from taxation. If you’re considering taking out a personal loan for personal reasons such as to purchase a car or to start your own business, it’s important to consult with an accountant or tax specialist to see if the loan is eligible for any of these exemptions.
Things to consider when making a personal loan decision
When deciding whether or not to take out a personal loan, there are a few things to keep in mind. The main consideration is whether the loan will be deductible for tax purposes. Here are four things to consider:
- The interest rate
The interest rate on a personal loan can be a major factor in whether or not it is worth taking out. If you expect to pay more in interest than you will in taxes over the life of the loan, it might not make sense to take out the loan.
- The terms of the loan
If you have to pay back the loan quickly, that could increase your overall cost of the loan and decrease its tax deduction potential. Consider how quickly you need to pay back the money, and see if there are more affordable options that offer longer terms.
- The amount borrowed
If you borrow too much money, it might be difficult to repay and thus may have less of an impact on your tax return. Conversely, if you borrow less money, it might mean that you have to pay back the money sooner and increase your costs in terms of interest and possibly fees.