Intuit Academy Tax Practice Exam

Interest on personal loans is typically not tax-deductible because the Internal Revenue Service (IRS) generally allows only specific types of interest to be deducted from taxable income. Personal loans are unsecured and used for personal expenses, which do not satisfy the IRS criteria for deductions.

In contrast, interest on business loans can often be deducted as a business expense, as businesses are allowed to deduct costs that are necessary for generating income. Mortgage interest can be deducted for qualified residences up to certain limits, making it a valuable deduction for homeowners. Student loan interest is also generally deductible, subject to income limitations, because it supports education-related expenses aimed at improving earning potential.

The deduction criteria set by the IRS thus highlight the limited circumstances under which personal loan interest can be deducted, leading to the conclusion that interest on personal loans is not tax-deductible.