Come tax season you’re anxious to get all the write-offs possible. As you pull all your bank statements and other financial documentation, you wonder if the interest rate you paid on your personal loan is tax deductible. Read on to discover if this is something you can capitalize on.

Personal Loan Interest Used to Be Acceptable

Interest rates were at a time deductible for your income taxes. This was for personal loans and credit cards. However, this is not the case any longer as Congress stepped in and created the Tax Reform Act of 1986.

The Treasury Department noticed that Americans weren’t cutting back on their spending habits. Savings were about a thing of the past. So if you purchase everything via credit, it could be deducted from your taxable income. This was bad news for the government as Americans tax liability was lowered – resulting in reduced tax revenues. So the personal interest category has been wiped clean with the exception of your home.

What Interest Payments are Eligible?

So let’s review what interest you pay is tax-deductible. There are four major categories that meet this criteria.

  • Interest on student loans
  • Interest on mortgage and home equity loans
  • Interest on loans for investment property
  • Interest accrued for any business you’ve invested in

So don’t count on the interest gained for unpaid utility bills, late fees, or your unpaid income taxes. You won’t get that deductible at all.

Was this Loan for a Business Expense?

As one of the categories is interest accrued for your business, consider if your personal loan was actually for your business. Many small businesses and startup owners do not have the credit or business income available to take a “business loan”. So this means you have to be creative and take a general personal loan or use your credit card.

To use this personal loan or credit card, you don’t want to mix your personal expenses either. So pay it off in full and revert it to business use only. This will keep your bookkeeping neat.

Make sure to keep detailed track of what each withdrawal or credit charge is used for. Keep every receipt or at least scan each receipt into a business tracking software. This will make it much easier for your accountant.

The bottom line is you can’t get over on borrowing money for free. The loopholes that used to exist are long gone.