IRS Finalizes Rules On The New Car Loan Interest Deduction

The Treasury Department and IRS issued final regulations implementing the new deduction for qualified passenger vehicle loan interest (QPVLI), a temporary benefit created by the One, Big, Beautiful Bill Act (OBBBA) that allows individuals to deduct up to $10,000 of interest paid on certain auto loans, even if they do not itemize deductions. The final rules largely adopt the proposed regulations issued in January 2026 but include clarifications in response to public comments received by the Treasury Department.

The deduction applies to interest paid on indebtedness incurred in taxable years beginning after December 31, 2024 and before January 1, 2029. To qualify, the loan must be secured by a first lien on an “applicable passenger vehicle,” meaning a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle with a gross vehicle weight rating under 14,000 pounds, whose original use commences with the taxpayer, and whose final assembly occurred within the United States. Vehicles assembled outside the United States do not qualify, regardless of the manufacturer’s headquarters location, and taxpayers may verify assembly location using the vehicle’s VIN or the window sticker.

The final regulations clarify several points that generated significant comment activity. On the personal use requirement, the rules confirm that a taxpayer’s expectation of majority personal use is tested only at the time the loan is incurred, not on an ongoing basis, so a later change in how the vehicle is actually used does not disqualify previously accrued interest. On loan structure, the regulations confirm that amounts customarily financed alongside the vehicle purchase, such as extended warranties, service plans, sales tax, and now vehicle-related accessories and GAP insurance, may be included in the qualifying loan balance, while negative equity rolled over from a trade-in remains excluded because it relates to a separate, prior purchase transaction. Interest must be allocated between qualifying and non-qualifying portions of a loan on a pro rata basis, a method the final rules retain despite industry requests for alternative approaches.

The regulations also confirm that the $10,000 annual cap applies per return regardless of filing status, and that taxpayers with multiple qualifying loans may aggregate interest across all of them before applying the cap. The deduction phases out for taxpayers with modified adjusted gross income above $100,000 (or $200,000 for joint filers), reduced by $200 for every $1,000 of income above that threshold, with no exception for head of household filers despite requests for a separate threshold.

A significant portion of the final rules addresses new information reporting obligations under Section 6050AA. Lenders and other interest recipients that receive $600 or more in qualifying interest from an individual in a calendar year must file an information return, soon to be captured on Form 1098-VLI, and furnish a statement to the borrower that includes a legend warning that the reported interest may not be fully deductible. Despite extensive industry pushback arguing that lenders lack the data needed to determine vehicle eligibility, Treasury declined to adopt a safe harbor and confirmed that lenders bear the burden of collecting the necessary information, including VINs and assembly location, to comply.

The regulations take effect 60 days after publication in the Federal Register. Individual taxpayers financing a new vehicle should confirm eligibility criteria before assuming any interest paid will qualify for the deduction.

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