Answer: Bad news... As much as we all wish we could deduct taxes from personal loans, any interest that you pay out on them are simply not tax deductible. For instance, if you were to take out a loan to pay off a car or to cover other expenses that might arise, the interest on the loan you received does not reduce any of your tax liability come tax season. Similar to this rule is the interest on credit cards. Any interest on credit card balances is, likewise, not tax deductible.
Personal loans are not tax deductible, however, other types of loans can be. Any interest that you have paid on your mortgage, business loans or student loans can be taken off on your yearly taxes. This will effectively drop down your taxable income for the tax year.
However, before these things become nontaxable, you must qualify for certain criteria in order to become eligible for the write-off. For example, a mortgage interest is only deductible from your taxes if the loan that you possess was taken out to purchase a primary or secondary home. It is also possible that you can claim a tax credit, which will then directly reduce the taxes that you owe the IRS. This is done in place of looking at what you owe rather than your taxable income. This is especially true if you have a mortgage credit certificate through a government-funded program like low-income housing.
If you are a business owner and use your credit card or a personal loan to finance any business expenses in addition to personal ones, it is possible that you may be able to claim the interest that you paid out on your expenses on your tax return. For this to take effect, you must be the person who is legally liable for the loan. If you aren't, you will miss the benefits of this exception.
Very similarly, if you own a vehicle that you use always or occasionally for your business then you can deduct all of or a portion of the cost from your tax return. The amount will be determined by several factors but mostly how much you use it for work purposes. For example, if you use the car for both personal reasons and business, then you will be allowed to deduct the loan interest that is proportionate to the time that you used your car for work. That means if you spend %50 percent of your time driving that vehicle for work, then you can deduct %50 of the cost from your tax return.
Exceptions like this also apply to the taking out of a loan to secure an S company, partnership or an LLC (limited liability corporation.) Keep in mind, however, that the rules wrapped up with these exclusions are complicated and it is a good idea to work with a tax professional if you fall into this rare but difficult category.
