Proposed regulations provide guidance on car loan interest deduction

The IRS released proposed regulations (REG-113515-25) on Wednesday providing guidance for taxpayers and lenders regarding the temporary deduction for qualified passenger vehicle loan interest.

The new deduction was enacted as part of H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act.

Car loan deductions under H.R. 1

For the years 2025 through 2028, the legislation excludes qualified passenger vehicle loan interest from the definition of personal interest in Sec. 163(h). Qualified passenger vehicle loan interest is defined as interest paid or accrued during the tax year on indebtedness incurred by the taxpayer after Dec. 31, 2024, for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle for personal use. Among other restrictions, applicable passenger vehicles must have had their final assembly in the United States.

The exclusion is capped at $10,000 per year and will phase out for taxpayers with modified adjusted gross income of more than $100,000 ($200,000 for married taxpayers filing jointly).

The deduction is available to taxpayers who take the standard deduction and those who itemize deductions.

Taxpayers

The proposed regulations provide details on eligibility criteria for the deduction, including:

• Taxpayers should use the vehicle identification number (VIN) or the final assembly point noted on the label that’s affixed to the vehicle. Taxpayers also can use the National Highway Traffic Safety Administration VIN Decoder website.
• A vehicle is considered a personal-use vehicle if, when the loan is issued, the taxpayer expects to use the vehicle for personal use more than 50% of the time.
• An “applicable passenger vehicle” must be a new car, minivan, van, sport utility vehicle, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds.

Lenders

The IRS previously provided transition relief in Notice 2025-57 for certain lenders and other taxpayers receiving interest for vehicle loans in 2025. In general, those persons must file new information return Form 1098-VLI with the IRS to report interest received during the tax year and other loan-related information. These information returns enable taxpayers to claim the benefits of the vehicle loan interest deduction.

To help lenders implement these information-reporting requirements, the proposed regulations clarify:

• Which lenders and other interest recipients are required to report and the time and manner for this reporting; and
• What information must be included on the form provided to the IRS and to taxpayers.

Public comments

The IRS is accepting public comments through Feb. 2 at Regulations.gov.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.