How to Report Personal Loan Interest Income

by Lee Nichols, Demand Media
    The borrower typically cannot deduct interest paid on personal loans.

    The borrower typically cannot deduct interest paid on personal loans.

    That loan you gave your friend to help him out might come back to haunt you if you don't pay taxes on the interest income you receive. The Internal Revenue Service considers interest you receive from personal loans as taxable income regardless of whether or not the borrower can deduct the interest from his taxes. You owe taxes on the income even if the borrower does not send you a Form 1099-INT showing the interest you received.

    Step 1

    Look at the 1099-INT you received from the borrower. If you did not receive a 1099 from the borrower -- which is often the case with personal loans -- you will have to calculate how much interest you received.

    Step 2

    Open Bankrate.com's loan calculator website if you have not tracked the amount of interest you received in the tax year. Enter the loan's amount, terms and interest rate. Specify the date you made the loan and click "Show/Recalculate Amortization." Use the table to determine how much interest you received from each loan payment.

    Step 3

    List amounts less than $1500 on Line "8a" of Form-1040 or Form-1040A, or on Line "2" if you are using Form-1040EZ.

    Step 4

    Complete Schedule B if you are reporting $1,501 or more in interest income. List the borrower's name and amount you received in Part 1 of the form. Complete Part III if you received more than $1,600. Attach the schedule to your tax return and write the total amount of interest you received on Line "8a" of your Form 1040 or Form 1040A.

    Tip

    • Protect yourself from loss by asking the borrower to sign a loan agreement specifying the loan's interest rate and repayment terms.

    Warning

    • If you make a no-interest personal loan of more than $10,000, you must document the transaction. Without documentation such as a loan agreement, the IRS can assume that you did not report the interest and, through "imputed interest," tax you for interest payments you never received.

    About the Author

    Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and graphic design and a Bachelor of Science in business administration from the University of Mississippi.

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