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  • Nick Hoard

Do You Have to File and Pay Income Taxes on Personal Loans?

Whenever tax season comes around, individuals and businesses start the tedious task of preparing all the paperwork needed, including forms related to your income, expenses, and assets. One particular item that continues to boggle many people to this day is the subject of personal loans and their effect on taxes. Yes, people ask if taking out a small personal loan in Murfreesboro, TN, can be considered taxable as income. The following article should help you answer the question.


Are Personal Loans Taxable?


Put simply, no, personal loans are usually not taxable as income. The money itself that you receive isn’t considered income since loan money is something you need to repay. On the other hand, income like wages or investment earnings is something you earn and get to keep.


Since personal loans aren’t considered a source of income, you don’t need to report them on your income tax return. This is true whether a bank, credit union, peer-to-peer lender or another financial institution lent you the money.


However, if you receive a personal loan from a friend or family member, there may be other tax implications, but the money still won’t be considered income for you. For example, if the loan has no interest or a below-market interest rate, as determined by the current “applicable federal rate,” the IRS may consider it a gift rather than a loan. For gifts such as this, the person who gave you the gift will be the one who needs to file and declare the money. You, on the other hand, don’t need to report anything.


Is a Personal Loan Taxable If It’s Forgiven?


A personal loan that’s forgiven is an entirely different matter. The tax laws governing personal and other forms of credit include a specific provision covering what’s known as the cancellation of debt. When this happens, and your debt is forgiven, the IRS will treat you as though you had income equal to the amount of the forgiven debt, which is now taxable.


Here’s a simple example:


Let’s say you took out a personal loan in Murfreesboro, TN, amounting to $10,000. You were able to pay $5,000 through your regular monthly payment, but then you faced an unexpected financial problem that made you unable to afford the final $5,000 of your principal. The lender can then cancel the remainder of your loan, which you are now expected to report. The $5,000 is now considered income, meaning you owe taxes on that amount, and they need to be filed.


Why Are People Confused About Personal Loans Being Taxable?


The main reason is probably because personal loans aren’t tied to a specific purpose like a mortgage or a car loan. You can basically use the money from a personal loan to do pretty much whatever you want with it. The flexibility of personal loans makes their tax consequences just a bit trickier to understand than other loans.


Conclusion


Borrowers can use personal loans for whatever purpose they deem necessary, but they aren’t considered taxable income when receiving the money from your lender. However, if the loan gets canceled, that’s the time your loan can be regarded as income and should be taxable and declared in your income tax return.


Hometown Finance is a reputable lender that’s been serving the Murfreesboro community since 2001. We approach lending through an understanding lens and recognize the importance of providing our clients the assistance they need when they need it the most. Contact us today for hassle-free installment loans in Murfreesboro, TN.


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