Many people want to know how taking loans, such as a personal loan would affect their tax situation, whether the interest is tax deductible or not. Well, interest on personal loans is surely not tax deductible.
If you take money to get a car for your personal use, or in case to cover any other personal expenses, the interest you submit on that loan does not reduce the tax liability. Moreover, the interest amount you pay on credit card balances is not tax deductible.
But, in any case, you should know when and how the personal loan you have taken might impact your taxes. This can help ensure that you do not miss any potential deductions. In this blog, we have mentioned some points regarding this situation which are discussed below.
Why Are Personal Loans Not Tax Deductible?
Usually, these loans are not tax deductible, but there are certain exceptions to them. You may get a tax-deductible interest on taking personal loans. This is possible if you use the loan for business expenditures, educational expenses, or even eligible taxable investments.
However, if the loan is not for any of these reasons mentioned above, then your personal loan will not in any way affect your taxes, here is why:
Firstly, it is not your income and secondly, intended for personal use only.
Can You Get Tax Deductible Interest on Loans?
Yes; however, it totally depends on how you use the amount. There are some circumstances under which you can get tax deductible interest on personal loans.
Types of Loans With Tax Deductible Interest
The criteria include:
People can deduct interest on mortgages. This is when they decide to use the money to buy, make, or improve their home. If you submitted mortgage interest pointers, those payments might also be deductible.
However, the law limits the amount of interest you may be able to deduct. At this time, the amount you may be able to deduct interest on is $375,000 worth of debt, or $750,000 if you are married and file jointly. Higher limits include $500,000 and $1,000,000
If you opted for student loans to qualify for higher education expenses, you could deduct around $2,500 as interest payments yearly. For the deduction of interest, expenses that are eligible include tuition fees, lodging, the amount for textbooks, or other necessary expenses.
Keep the potential tax issues that you can think of. This will help you to be more strategic about your loans. Mostly, small-scale businesses can greatly benefit since some loans can qualify them for a deduction even if they decide to use only a part of the amount for a business expense.