How you handle interest you get on a personal loan depends on the size of the loan and why you made it. Lending your brother $500 until payday is one thing; carrying a note on property you sold or lending your uncle's business $100,000 is something else. Whoever pays the interest should give you a form 1099-INT, but you're required to report interest received even if you don't get that form. If a buyer deducts interest on your note from his taxes and you don't report it on yours you could be in trouble with the Internal Revenue Service.
Report interest of more than $1,500 on a Form 1040 Schedule B Interest and Ordinary Dividends -- it's on the back of the Schedule A for itemized deductions. List each source of interest income on a separate line, starting with any interest from a self-financed mortgage. Show the name of the payer and the amount of interest received. Include personal loans with any other interest you receive, such as bank accounts or savings bonds, using a separate line for each.
Have a firm loan agreement for any personal loan showing the amount and term of the loan, the interest rate and other details. Use this to document any interest you receive that is not reported to you on a 1099-INT. Add the total of all interest received on personal loans and report in on line 8a of Form 1040. Report interest of less than $1,500 on line 8a, without a Schedule B. Use Schedule B if your total of all interest, not just personal loans, is more than $1,500.
Prepare your own 1099-INT if you received interest as a nominee, that is, if the 1099 is in your name but some actually belongs to someone else. For instance, if you and a sister share a savings account but you get the 1099-INT because your Social Security number is first on the account, you report the total on your 1040, but subtract her share as a "nominee distribution," identifying the institution that paid the interest. Prepare a 1099-INT for the sister for her share, listing you as the payer, with a copy to the IRS, for her to report her share as income. Record on Schedule B any interest you received from another nominee, with a 1099-INT. Refer to IRS Publication 550, Investment Income, to resolve any questions.
- Interest on personal loans and other sources reported in line 8a is figured into your total income, along with any salary, wages or other income.
- Be careful about making loans with no interest or with interest below market rates, as the IRS may consider these as taxable gift loans.This will not apply to most small personal loans. It does not apply to a non-investment loan with a balance less than $10,000. If the loan is under $100,000 the interest the lender claims is limited to the amount of the borrower's investment income and is exempt if the amount is less than $1,000.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.