Are Personal Loans Taxable & Considered Income? | Personal-finance | fredericksburg.com – Fredericksburg.com

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Are Personal Loans Taxable & Considered Income?

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As you prepare for tax season, you’ll need to get your paperwork in order, including forms related to your income, expenses and assets. And you may be asking if personal loans are taxable and if you should include any paperwork for them in that pile.

Your personal loan is just that: a loan. Most of the time, your personal loans won’t come into play during tax season. But there are some instances where you could see an impact. Here you will learn how you should approach your loans while doing your taxes.

Do Personal Loans Count as Income?

A personal loan is a loan you can use for almost anything, like covering the cost of an emergency, wedding or home repair. They’re generally unsecured, or loans that don’t require an asset to borrow money. Secured loans, like auto loans and mortgages, use collateral to secure your loan.

Because income is classified as money that you earn, whether through a job or investments, loans are not considered income. You don’t make money from your loan; you borrow money with the intent of paying it back.

Are Personal Loans Taxable?

Since personal loans are loans and not income, they aren’t considered taxable income, and therefore you don’t need to report them on your income taxes. However, there are some instances where you could face tax implications from a personal loan.

Your personal loan is considered a debt. As long as you are on track for paying it back, you shouldn’t worry. However, if part of your loan gets canceled, you may find yourself in a very different situation, one that may prove costly.

What Happens If Your Personal Loan Is Cancelled?

If you fall behind on payments or can’t afford your loan, there’s a chance you’ll be sent to collections and eventually default on your loan. If you work with a credit management agency or file for bankruptcy, you might work out a payment plan or a portion of your loan can be canceled.

In these cases, the lender issues a cancellation of debt (COD) on the canceled amount. A COD means you’re no longer responsible for paying back your loan. You’ll receive a 1099-C form from your lender that you’ll need to submit with your tax return when you file and report the canceled amount.

Let’s say you borrow $10,000. You pay the first $5,000, but then you face an unexpected financial problem that makes you unable to afford the final $5,000 of your principal. The lender can cancel the remainder of your loan—$5,000. What does this mean for you? Well, come tax season, you’ll be expected to report the remaining $5,000 as income, which means you’ll owe taxes on that amount.

Are Interest Payments Tax-deductible?

While there are some loans with tax-deductible interest payments, including student loans, mortgages and business loans, personal loans’ interest payments generally are not tax-deductible. However, there are some instances where personal loans’ interest payments are tax-deductible. For example, if you’re able to show that you used a personal loan for business needs, your interest payments may be tax-deductible.

If you used all or a portion of a personal loan for business purposes, talk to a certified public accountant (CPA), accountant or other tax professional before you claim this on your taxes. The last thing you want is running into trouble with the IRS.

Frequently Asked Questions (FAQs)

Are other types of loans considered income?

Because a loan means you’re borrowing money from a lender or bank, they aren’t considered income. Income is defined as money you earn from a job or an investment. Not only are all loans not considered income, but they are typically not taxable. The only time a loan would be considered income is if the loan was canceled by the lender or bank.

What is taxable income?

Simply stated, taxable income is the amount of your total income that the IRS can tax. It typically includes salaries, wages, freelance earnings, tips and bonuses (yes, that hefty end-of-the-year bonus of yours will be taxed). Taxable income also includes debt, or loans, that may have been canceled. You can lower your taxable income by taking advantage of itemized tax deductions.

What is nontaxable income?

Nontaxable income is money you may have earned through other sources besides a job or investment that the IRS won’t tax come tax season. While nontaxable income ranges, it typically includes accidents and personal injury rewards, cash rebates, child support, alimony, federal tax refund, money gifts, scholarships, grants and veteran or welfare benefits.

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