Personal loans are applied for various purposes and are comparatively easier to obtain. Moreover, these loans provide absolute liberty to the borrowers to spend the money for anything they wish for. However, loans’ interest is taxable indicating that you need to pay extra for tax. Tax induced loans creates an added financial pressure and thus, keeps many people from applying for loans. However, not all loans are taxable. IRS provides tax deductible home loans based on the purpose for which the loan has been applied.
The tax deductible personal loans vary from time to time by the IRS. So, it is important to understand under what circumstances you can avail tax deductible personal loans to avail maximum benefits. In the following section you will find a detailed discussion on tax deductible personal loans and when you can avail them.
Personal Loan and Tax Deductibility
Tax exemption is not allowed on personal loans by Internal Revenue Services, IRS in general. The IRS is responsible to decide whether to deduct tax on certain personal loans or not. Since, personal loans are used for miscellaneous purposes like, vacation trips; IRS does not deem such loans as eligible for tax deduction. However, there are some special personal loans which the IRS considers as tax deductible personal loans. These include:
- Certain Business Loans
Business owners often apply for personal loans for business investments. Such loans can qualify for tax deductible interest’s rate. However, you need to specify what proportion of the loan amount you are going to spend for your business.
Based on that proportion you will avail tax exemption. For instance, you have bought land to set up a business but you use 30% of it for other uses. Then you will get a tax deduction on 70% of the loan amount only.
- Higher Education Expenses
In case you apply for a personal loan for qualified higher education purposes, the IRS would provide a tax reduction on your loan interest. Especially, if you use the money for tuition fees, buying books and certain other education fees. Government provides this tax exemption on personal loans to encourage people to obtain higher education degrees. However, you need to show them that you are pursuing a degree, certificate or credential.
This may be a part-time endeavor but you need to produce a proper degree certificate. But in case you are dependent on someone else’s tax return or if your marital status is separated you won’t be able to avail tax exemption on personal loans.
- Taxable Investment
You can apply for interest reduction on your personal loan if you are investing on taxable investments such as funds, stocks, and some other bonds.
- Mortgages
The IRS provides tax deductions on mortgage interest loans up to some extent. Especially, if you are using the loan to buy new property, or build a new one or you are renovating your home that involves substantial expenditures. However, you will have to itemize your deduction to avail the benefit of tax deduction.
On the other hand, to avail such tax exemption on personal loans from banks you need to maintain a healthy credit score. A low credit score will automatically increase your interest rates and you will also not be able to obtain tax exemption on the above mentioned personal loans. So, if you are struggling with a low credit score, you must consult credit repair services in Sacramento for an expert solution.
Conclusion
The blog has discussed tax deductible personal loans in detail. Make sure you provide proper documents to avail tax exemption on personal loans. Additionally, make sure you have an impressive credit score to avail maximum tax exemption on personal loans.
