When a person takes out a loan, does he owe taxes on that loan?

You don't pay income taxes on a loan.  In some cases (like mortgages and student loans), the interest paid is tax-deductible.

You don't owe taxes on the loan. Did someone put a gun to your head and force you to take out the loan with a $7,000 interest fee?

No, a loan isn't considered income, therefore it is not taxed. If you fail to pay back the loan and it gets charged off, you have to pay taxes on the charged off amount. At that point it is considered a form of income.

If the person takes out the loan AND pays it back, then the person does not owe tax on it.

However, if a person takes out a loan and the lender either forgives or cancels the debt, so the person does not have to pay back the entire loan, then the person has to pay tax on the part that was not paid back.

The only time you would pay taxes on the loan itself is if the loan is "forgiven", canceling the debt.  If you don't have to repay the loan, the amount is considered income, and you pay taxes on that.

No.  Loans are NOT taxed because they are NOT INCOME.  You pay them back with your TAXED money.


As mentioned - in some cases, the interest you pay MIGHT even be a tax deduction if the loan qualifies AND if you have enough deductions to itemize  your tax return.  (student loan interest MIGHT be deductible even when you can't itemize your other deductions)

If you ever file bankruptcy - then any portion of the loan that had not been repaid, along with other unpaid debts MIGHT become taxable income based on the judgement determined during the bankruptcy process.  

In most situations, loans don't affect your taxes.

The $20k you borrowed isn't income because you have to pay it back - which you will do with after-tax income.

The $7k interest (probably) isn't a deduction because that was your choice to spend that money to get the initial $20k earlier rather than saving up over time.

If the interest is mortgage on your house then its deductible. Student loan interest can be taken as an adjustment to income with some limitations. And interest on business loans can be written off against the business as an expense.

But most of the regular loans you might get such as car loans, personal loans, etc are not a tax deduction.

Also if you fail to repay the loan and the lender forgives the debt then the unpaid balance becomes income. If that happens the lender would send you a 1099-C showing the amount of income you have to report.

Loans are not income.

you don't owe tax on a loan, unless you default

You don't pay taxes on the loan itself, but you may have to pay taxes on what you bought with the loan.  If you buy a car you would need to pay registration fees, which are essentially taxes.

Loans ARE NOT income, and don't show up on a tax return.
Note: Depending on the length of the loan, that could actually be a LOW interest rate.

The borrower would owe nothing.