What usually goes without saying for mortgage borrowers is often forgotten by personal loan borrowers: loan interest deductions on your tax return. In fact, it is really quite simple to do.
- Are loans tax-deductible?
- What can I deduct?
- How to deduct interest charges
- Other deductible expenses
Can I deduct interest charges from my taxable income?
Yes, private individuals can deduct interest paid on debt during the tax year from their taxable income (for both direct federal and cantonal tax) – up to a limit equal to the gross private investment income plus an allowance of 50,000 francs. Of course, this rule includes interest on personal loans. The allowance alone is not usually sufficient for deducting the interest charges on one or more loans in full. Deducting interest charges is well worth it in many cases.
Example of how much tax you could save:
Interest on a personal loan of 25,000 francs over a term of 36 months can quickly mount up to some 1,800 francs in the first year. Assuming a tax rate of 10%, you would save 180 francs on tax.
What can I deduct?
The interest charges are not the same as the total amount that a personal loan borrower transfers to the lender's account each month. These monthly payments comprise an interest amount and a repayment amount. You can only deduct the interest amount from your taxable income – not the repayment amount.
It's also worth noting that with personal loans, the deductible amount usually decreases from year to year. This is because the interest amount of the monthly instalment decreases during the course of the repayment term, while the repayment amount increases. Consequently, the interest charge deductions are considerably lower when you get close to the end of your repayment term than they are at the beginning.
How to deduct interest on debt
It's quite easy: in January, you receive a certificate of interest from your lender showing the tax-deductible interest charges along with the outstanding debt as at 31 December. You enter this information for each loan in the debt statement of the tax return under “Personal debt”, then transfer the total to the main form. Then, you just need to remember to attach a copy of all the interest certificates to the tax return. If you did not receive a certificate of interest, you can request one from your lender.
- In January, you receive a certificate of interest from your lender.
- In the debt statement of the tax return, find the section on personal debt.
- Enter the tax-deductible interest charge or charges and the total outstanding debt.
- Make a copy of all certificates of interest and attach them to your tax return.
- If you did not receive a certificate of interest, you can request one from your lender.
Other deductible expenses
You can also deduct interest charges on private loans i.e. those from family members or friends, as well as on other forms of credit such as credit card debt. Interest on leases, however, is not deductible, as from a tax point of view, leases are considered a form of rental. So if you are buying a car, it makes more sense – purely from a tax perspective – to finance the vehicle using a loan rather than a lease.
If you are deducting interest charged on a private loan and therefore do not have a certificate from the lender, you should enclose copies of the loan agreement and bank statements showing all payments with your tax return.
Deducting interest charges from your taxable income is a simple and valuable way of minimizing your tax burden. So don't forget to claim the personal loan deduction on your next tax return.
Learn more about tax deductions in Switzerland here.