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What to Know When It Comes to Your Taxes and Personal Loans

There is a wide range of purchases people need to make that banks are more than happy to offer varying loans for. People looking to do renovations for existing homes usually take out home equity loans. They end up getting a mortgage loan when they're looking to buy a home for themself. Are you trying to buy a car, truck, or some kind of vehicle? You can look into taking on auto loans to help cover the cost.


Sometimes, the need (or want) will not fall under those general big-ticket categories. That's where personal loans come in. Aside from full-on flexibility in how the borrowed money gets spent, collateral isn't needed.


Loans Will Vary


Tax implications are a key factor in taking on loans. Mortgage loans, for instance, come with mortgage interest that's generally deductible through tax returns. The tax savings resulting from that can mean a whole lot in the homeowner cost post-taxes. Personal and auto loans don't generally give off tax deductions, so poking around for possible tax implications might not yield much.


Read on to learn more about your taxes and personal loans:


A personal loan does not equate to taxable income


This is because there's already an obligation you're taking on to pay the money you're getting back eventually. A principal repayment can't be deducted from a loan that's paid back. In turn, income taxes on loan proceeds do not have to be paid. The rare exception is when the personal loan isn't from an impartial third-party financial institution like your bank.


Did your employer give you a personal loan without the expectation of repayment? The Internal Revenue Service (IRS) could see it as compensation in that case, making you list the loan as earned income. Any loans made in good faith, even personal loans for bad credit, will be hard-pressed to get treated as income by tax authorities.


Taxable income generally stems from loan forgiveness


As previously mentioned, personal loans are generally tax-free when there's an expectation that it will be repaid. Forgiven loans will require the whole amount to be considered as income. That falls under cancellation of debt, forcing most taxpayers to recognize the amount of debt that's forgiven as income.


There are variables involved depending on why the loan was forgiven by the financial institution. When a bank decides not to force repayment, then cancellation of debt income will likely happen. A bankruptcy proceeding being filed with a subsequent personal loan debt court order, particular laws on bankruptcy will prevent the need for taxable income recognition. Loan forgiveness will generally require a payment of some sort to the IRS, though special exemptions may yet apply.


Conclusion


Banks are more than happy to have different loans available for customers' varying needs. When buying a home, there are mortgage loans; buying a vehicle means auto loans, and so on and so forth. It's important to remember that loan forgiveness is what causes taxable income, and that a personal loan doesn't equate to taxable income.


Looking to make small personal loans in Madison, TN? Reach out to First Finance Company Madison! We have been a neighborhood lender in the Davidson area for over 21 years.


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