If you have been considering applying for any type of loan, you might have questions about how it will impact your taxes. Whether you carry a mortgage, auto, home equity, or personal loan (or any combination of those), your annual tax filing with the IRS will be impacted.
One of the significant factors in choosing a loan, for various reasons, is to understand the tax implications it’ll have. For instance, the mortgage interest from the money you borrow to purchase a home can be shown as an itemized deduction on your tax return. These deductions can provide significant tax savings, and hence make a lot of difference in the after-tax cost of owning a home. Tax deductions do not usually apply to most other types of loans, such as personal and auto loans. Let's go a bit deeper and find out the differences between loans, and the tax implications each of them might carry.
Mortgage Interest Deduction
The mortgage interest deduction allows you to reduce your taxable income by the amount of money you've paid in mortgage interest during the year. If you have a mortgage and a good payment record, you may see a significant reduction in your tax bill because of the interest paid on the home loan.
With the introduction of the Tax Cuts and Jobs Act, the law for the Mortgage Interest Deduction was revised, and the changes took effect beginning with returns filed in 2019. Meaning, whether you have already claimed the deduction, or if you have filed for the deduction for the first time, there are important details in the new Act which will potentially affect the amount of taxes you can save for the year. For example, if you currently have a mortgage worth up to $750,000, you can claim the deduction. This was changed to $1 million when President Trump signed the Tax Cuts and Jobs Act.
Personal and Small Business Loans
Usually, personal loans will not affect your taxes because this type of loan is not considered income. The only exception to this is when a financial institution forgives the loan and issues you a cancellation of debt (COD). If you were issued a COD, it means you do not need to repay the loan's principal or interest.
If you received any money from a COD, it is considered income and can be taxed. When you're issued a COD, you'll also receive a 1099-C form, which needs to be submitted with your taxes at the end of the year.
The interest paid on a personal loan is not tax-deductible if you use the money for personal uses, such as a vacation, buying a piece of furniture, etc. However, if you use the money for your business needs (a small business loan), you can deduct some of the interest paid, depending on how the money was used. For example, if the money was used for business-related expenses like rent, wages, office equipment, etc., the interest may be deductible. You may need to submit a detailed report explaining the portion of interest paid on the loan that was spent on business needs.
Typically, you're not permitted to deduct car loan interest from your taxable income. However, there is one exception to this rule.
If your car is used for business purposes ONLY, you can deduct a portion of the car loan interest as a business expense when filing your taxes. You will need to keep accurate records for tracking when and how the vehicle was used for business needs.
We hope this sheds some light on what type of loans you can or can’t use as deductions when filing your taxes. If you would like more information about how you can benefit from a personal or small business loan, please contact one of our experts at LoanMe with all of your questions. We offer flexible repayment options to fit any budget and can get you the money you need in a matter of hours.