Do You Have To Pay Taxes On Your Payday Loan?

As you prepare for tax season, it is easy to feel overwhelmed with documents regarding what you can and can’t add when getting your paperwork in order. Forms are usually related to your income, assets, and expenses. 

But there are some instances, such as debts, that have contradictions while doing your taxes. Today, we will break down the debts that come in the form of payday loans.

When the financing from a payday lender hits your bank account, you may be asking the following:

  • if payday loans count as income;
  • if they are taxable;
  • if interest payments on them are tax-deductible;
  • if you should include any paperwork for them.

Here you will find answers to these questions and learn how you should approach your payday loans while preparing your tax forms. But before all this, let’s find out the basics of a payday loan.

What is a Payday Loan?

A payday loan is a source of short-term financing that you can use for things like unexpected expenses, home repairs, medical bills, or personal events, to name but a few. This type of loan is considered a form of unsecured debt, requiring just your promise to repay and electronic access to your credit union, bank, or prepaid card account.

In general, payday loans make up around 6% of U.S. consumer debt, so many people can be unfamiliar with how they work and what the IRS implications could come with them.

Are Payday Loans Considered Taxable Income?

The short answer is no. The IRS system generally doesn’t count payday loans as income since you don’t make money from your loan. Instead, you borrow cash with the intent of paying it back – it remains the property of the lending provider, neither being a gift, income, or salary.

Because of that, you are not going to be taxed on the amount of money you obtain from the provider. However, there are some instances where you could meet the implications from a payday loan. If you end up with a part of your loan canceled, the situation may be different.

Related reading: Debt Management Plan Tips for Single Moms

What Happens If the Provider Cancels Your Payday Loan?

As we have said earlier, most of the time, your payday loans don’t come into play during tax season. So, you should not worry as long as you are on the track of paying your debts back on time.

The story changes, though, if you fall behind on repayments or can’t afford your monthly obligations anymore. There is a chance you will eventually default on your loan and end up dealing with a collection agency. In this case, the provider might send a form on the canceled amount you are expected to submit as regular income on your tax return.

For instance, let’s say you have $1,000 in your current debt amount. After repaying $600, you face financial hardships and realize you can’t finish paying the principal back on time and in full. The provider agrees to cancel your payday loan once you pay a penalty for missed payments. As a result, you are expected to report the remaining $400 as regular income during tax season.

Are APRs on Payday Loans Tax-Deductible?

Payday loans don’t come with tax-deductible interest payments if you qualify. If you get a payday loan, you typically will not reduce your income based on the interest you pay in principal.

Despite payday loans generally having a neutral impact on your tax return, you may, however, use them to pay any outstanding taxes you owe. But this will happen only if you manage to prove to the revenue service that you used a portion or all the amount of the loan for a business or student purpose. It is worth speaking with a tax consultant if you are seeking this type of tax benefit.

Final Thoughts

Most of the time, payday loans are not taxable. However, there are instances when you might need to pay taxes on amounts that are canceled. In addition, with a payday loan, you can’t generally expect to receive tax benefits on the interest you pay each month.

A payday loan is a great option you can use for almost any not-too-expensive instances, like covering the cost of an emergency, home improvement, car repair, or medical bill. But as with all other sources of financing, it is crucial to manage the money borrowed wisely and to find alternatives before agreeing to sign a loan offer.


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