Do You Put a Personal Loan on Your Income Tax?

Personal Loan Income Tax

Do You Put a Personal Loan on Your Income Tax?

When you’re in need of money to cover an emergency obligation, you usually don’t think about how that will affect taxes. At the moment, you’re focused on fixing your car or paying for your loved one’s operation.

However, many people forget about taxes even when they take out personal loans for less pressing concerns like consolidating their debt or paying for their wedding.

It’s only when April begins to roll around that they start worrying about whether or not they’ll need to pay a personal loan income tax.

Is There a Personal Loan Income Tax?

The good news is that, no, you don’t need to pay an income tax on your personal loan. Even if the loan was for $100,000 or more, it wouldn’t count as income, so it wouldn’t incur a tax.

In fact, this goes for any type of lending. Income taxes don’t affect loans of any kind, period.

While there have been certain court cases wherein it was decided that a loan was actually being used as a form of compensation, those are incredibly rare. If you’re taking out a standard personal loan, this isn’t a very realistic risk.

The One Exception Everyone Forgets About

That being said, there is a major exception that could require you to report a personal loan on your income tax forms. This is extremely important to understand because many people don’t understand this and end up in trouble with the IRS unnecessarily.

Cancellation of Debt

There may be any number of reasons a borrower receives a reprieve from having to pay back the amount they own to a lender. 

If that is granted to a debtor, any proceeds associated with the loan are going to be classified as cancellation of debt (COD) income by the IRS. As income, it will be taxed. The taxable amount only refers to the portion that was forgiven, though. If the borrower already paid back, say, half the loan, the proceeds from that would be tax-exempt.

Unfortunately, this isn’t always so straightforward.

For example, if the loan is forgiven by a private lender and treated as a gift, then it’s no longer income and no longer taxed as such.

However, if the gift amount forgiven exceeds $13,000 in a given year, that total is subtracted from the gift tax’s $1 million lifetime exemption.

If the debt is cancelled because the lender passes away, that wouldn’t qualify as income, either.

Discharging Debt

There is also the matter of discharging debt.

If a loan is discharged due to a bankruptcy, it doesn’t count as income. This also applies to insolvency status.

Other Factors to Consider When Taking Out a Personal Loan

There are a number of benefits that come from securing personal loans, but that doesn’t mean you don’t need to be careful when considering one.

While it isn’t treated as taxable income, here are three factors you need to think about, so it doesn’t become more of a burden than a blessing later on.

1. How Much You Actually Need

You can spend a personal loan on anything you want, so make sure you’re borrowing the amount you need.

If you’re not entirely sure how much your expenditures will require, consider taking out a bit more. You can always use the excess amount toward your first payment.

2. How Long You’ll Need to Repay It

While it might be nice to give yourself plenty of breathing room when repaying your loan, just know that the longer the repayment period, the more you’re going to end up paying because of interest. A more aggressive repayment period will mean the loan costs you less.

Use a repayment calculator to figure out what kind of schedule will work best for you.

3. Hidden Terms

Finally, keep an eye out for hidden terms. Generally speaking, you want a fixed-rate loan as these offer the most consistent repayment process without any surprises. 

The Easy Path to a Personal Loan

You will find the entire personal loan process can be accomplished online.

Just visit
. If approved you can receive up to $4,000.