Personal Loans And Tax Deductions
Channel: Dime Dive
Date: 2023-09-06

Interest payments on personal loans and credit card balances are generally not tax-deductible. They won't reduce your taxable income.

However, there are exceptions. Interest on mortgages, student loans, and business loans can often be deducted from your annual taxes, effectively lowering your taxable income.

To qualify for these deductions, specific criteria must be met. Mortgage interest is deductible when it's used to buy a primary residence. In some cases, you can claim a tax credit for mortgage interest through low-income housing programs.

Using personal loans or credit cards for both personal and business expenses might allow you to deduct the interest paid on those expenses, provided you can clearly separate the business portion and itemize it.

Similarly, if you use a personal loan to buy a vehicle with business purposes, a portion of the interest can be tax-deductible, depending on the percentage of business use.

These exceptions also apply to investments in S corporations, partnerships, or LLCs, but these deductions can be complex, so consulting a tax professional is advisable.

For student loans, interest is tax-deductible if your modified adjusted gross income (MAGI) is below certain thresholds. The deduction can reduce taxable income by up to $2,500. It applies to loans taken out by the individual, their spouse, or a dependent, and it's classified as an adjustment to income.

The loan must be a "qualified" student loan, covering eligible higher education expenses such as tuition, fees, books, and other essentials. The institution must also be eligible for federal financial aid programs.

As for credit card interest, it's not tax-deductible under any circumstances.

In conclusion, personal loans generally don't offer tax benefits unless they're used for specific business or educational expenses. If you're borrowing for education, consider a student loan for potential tax advantages.