New IRS Guidance on Car Loan Interest Deductions: What Taxpayers Need to Know

In Summary

• Temporary auto loan interest deduction (2025–2028): Under the One Big Beautiful Bill Act, taxpayers may deduct up to $10,000 of interest paid on qualifying passenger vehicle loans for personal-use vehicles purchased after December 31, 2024, and before January 1, 2029, even if they take the standard deduction, subject to income phaseouts.

• Strict eligibility requirements apply: The vehicle must be new, assembled in the U.S., used primarily for personal purposes, and financed with a first-lien loan incurred after 2024; the deduction phases out starting at $100,000 (single) and $200,000 (joint) of modified AGI and is fully phased out at higher thresholds.

• New lender reporting rules: Lenders receiving $600 or more of qualifying interest must report it to the IRS and provide borrower statements, with limited reporting relief in 2025, making accurate documentation and advance planning essential.

________________________________________________________________________________

The IRS has released proposed regulations that clarify how certain taxpayers may deduct interest paid on passenger vehicle loans, along with new reporting requirements for lenders. This guidance affects individuals who purchase vehicles for personal use between 2025 and 2028 and may be eligible for a temporary tax deduction of up to $10,000.  Here’s what you need to know and how it may apply to your tax situation.

Car Loan Interest Deduction

Under the One Big Beautiful Bill Act (OBBBA), interest paid on certain passenger vehicle loans may now qualify as a deductible expense, even though personal interest is generally not deductible.  For tax years beginning after December 31, 2024 and before January 1, 2029, qualified passenger vehicle loan interest (QPVLI) is excluded from the definition of nondeductible personal interest. This allows eligible taxpayers to deduct the interest paid on qualifying auto loans during this four-year window.

To qualify for the deduction, both the loan and vehicle must meet specific requirements.  The vehicle must be an applicable passenger vehicle purchased for personal use that is both new and had its final assembly in the United States. The taxpayer must expect the vehicle to be used more than 50% of the time for personal purposes. Original use begins with the first person who takes delivery of the vehicle, not the dealer.  The loan must be incurred after December 31, 2024. It must be used to purchase the vehicle and be secured by a first lien (lease payments do not qualify).  The financing may include customary vehicle-related costs, such as extended warranties, vehicle service plans, sales tax, and title fees.

The deduction is available to individual taxpayers, estates, and certain trusts.  Taxpayers may claim the deduction whether they itemize or take the standard deduction, making it accessible to a broader group of filers. The maximum deduction is $10,000 per federal tax return, so single taxpayers and married couples filing jointly are limited to $10,000 total, but married taxpayers filing separately would each have their own $10,000 limit.  The deduction starts to phase out when modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers.  The deduction fully phases out at $150,000 for single filers and $250,000 for joint filers. Special rules apply when vehicle interest overlaps with interest otherwise deductible under business or investment rules, preventing duplicate deductions.

The proposed regulations also introduce new information regarding reporting obligations. If a lender or other interest recipient receives $600 or more of interest on a qualified vehicle loan from an individual during the year, they must file an information return with the IRS and provide a written statement to the borrower identifying the interest paid as important tax information.  These statements will include a notice that penalties may apply if interest deductions are overstated.  There is reporting relief for vendors for 2025, where only a statement indicating the total interest may be made available to the borrower.

If you’re planning to purchase a vehicle for personal use between 2025 and 2028, this temporary deduction could provide meaningful tax savings. However, eligibility depends on how the vehicle is used, how the loan is structured, and proper documentation from the lender.  Because the rules are detailed and the regulations are still proposed, planning ahead is critical.

Our firm is closely monitoring IRS guidance on this deduction and can help you determine whether your vehicle loan qualifies, maximize allowable deductions, and avoid common reporting or compliance issues.  If you’re considering a vehicle purchase or have questions about how this deduction applies to your situation, contact our office to discuss your options.

Effective for tax years beginning January 1, 2025, through December 31, 2028.

Contact Us

If you have questions or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-809-9189 or click here to contact us. We look forward to speaking with you soon.