What is taxable income?

Almost every person thinks about his taxes. That is why it is important to check all your documents before the tax season so that everything is in order. However, many people do not know if personal loans are taxable or not, so they prefer to deal with them before the start of the tax season. Of course, it is important to understand whether any loan is a source of income and whether it is worth paying taxes.

Typically, personal loans are just loans and not a source of income, so you shouldn't think about them during tax season. A loan is just the money you borrowed, while income is the amount of money you have earned. But not always everything should be taken literally. Since the cases are different, it is worth exploring what to do with the loans while paying taxes.


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Is a personal loan considered a source of income?

As you know, a personal loan is a type of lending that gives people the opportunity to get financing for any personal need, such as paying for medical treatment, making a big purchase, repairing a car, and so on. A personal loan is usually unsecured, that is, it does not require collateral for your application to be approved (unlike a mortgage and car title loan). So, does a personal loan count as income? And why?

Any amount of money you make is considered income. Thus, if you have a main job, a part-time job, an online store, investments, or any money you earn, this is considered a source of income. However, a loan is not money you make. As already mentioned, often people take out a loan to cope with difficulties and buy what they cannot afford with their paychecks. Thus, a loan is not income, but someone else's money that you have borrowed and must be repaid within a certain period of time. In short, the loan is not income.

Are personal loans taxable or not?

As already mentioned, a personal loan is not a source of income. Thus, you don’t need to report a loan on your income taxes as it does not count as income. However, there are a few things you should pay attention to when you may face tax consequences due to a personal loan. As you know, your personal loan is your debt. If you make payments on the loan on time, then you will not have problems with taxes. However, if part of your loan is canceled, it can cost you a lot of money. Let's take a closer look at what happens if your personal loan is canceled.

If you are faced with a difficult financial situation, most likely you will delay the payment of the loan and perhaps the lender will turn to collectors to collect the debt. Thus, the probability that you will not be able to repay the loan is quite high. Typically, in such a situation, you can file for bankruptcy or develop a debt repayment plan, and some of your loan debt can be canceled.

If part of the debt is canceled, then the creditor issues a cancellation of debt (on the canceled amount). Thus, you are no longer responsible for paying off your debt. However, the lender will provide you with a 1099-C form you will need to submit (with your tax return) when you report the canceled amount. So, when tax season comes, you will need to report your canceled debt as income. So you owe taxes on that amount. After examining such circumstances, keep them in mind when paying taxes.

Is any other loan considered a source of income?

No, it’s not. As already stated, income is any amount of money you make. A loan is money that you have borrowed and must be repaid within a set period of time. Thus, the loan is not considered a source of income and you do not have to worry about it. What's more, loans are not only not considered income, they are not taxed either. As already stated, only if part of the loan was canceled by the lender or the bank, will your loan be considered income and taxed.

Taxable and nontaxable income

If you do not know the difference between taxable income and non-taxable income, you should study the information on this topic in detail. However, for now, learn the basics to help you understand taxable and nontaxable income.

Taxable income is the sum of your total income, which may include wages, salary, bonuses, tips, freelance earnings, etc. Also, as we said earlier, taxable income includes debt or loans that may have been canceled.

Nontaxable income is money that you may have received from other sources and that the IRS will not tax. Typically, this income includes child support, federal tax refund, money gifts, alimony, accident, and personal injury rewards, scholarships, cash rebates, and so on. Thus, it is important to understand the difference between taxable income and non-taxable income in order to avoid a difficult life situation.

Bottom line

When preparing for tax season, remember that a loan (personal or any other) is money that you borrowed from a lender and must return, so it is not considered income and is not taxed. However, the exception is when the loan debt is canceled. In this case loan is considered as a source of income and you have to pay tax on this debt. Knowing what is taxable and nontaxable income will help you understand how to properly prepare all your documents for tax season in order to avoid unwanted problems.