New Passenger Vehicle Loan Interest Deduction: What Tax Professionals Need to Know

Sharon Kreider, CPA

The IRS just released proposed regulations on the temporary auto loan interest deduction created by the One Big Beautiful Bill Act. This provision allows certain taxpayers to deduct up to $10,000 of interest on loans for new, U.S.-assembled vehicles through 2028. While this sounds straightforward, the details reveal some important planning considerations that will affect how we advise clients.

Understanding the Basics

The deduction is available only to individuals, decedents’ estates, and non-grantor trusts. One of its more unusual features is that it’s available whether the taxpayer itemizes or takes the standard deduction. This makes it particularly valuable for non-itemizers who otherwise have no way to deduct auto loan interest.

However, there’s an important limitation: the $10,000 cap applies per return, not per taxpayer. This means married couples filing jointly get $10,000 total, not $20,000. That’s going to disappoint some clients who assumed they could each claim the deduction.

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The Personal Use Requirement

The regulations clarify one of the statute’s more ambiguous provisions by establishing a 50% personal use test. The vehicle must be expected to be used more than 50% for personal use when the loan is incurred. What’s particularly helpful here is that this is a one-time determination. Taxpayers don’t need to track actual usage in subsequent years or worry if their circumstances change. The test is based on intent at loan origination.

The regulations take a family-oriented approach to what counts as personal use. It includes use by the taxpayer, their spouse, or relatives under §152(c)(2) or (d)(2). For example, a parent who finances a car primarily for their college-age daughter’s use satisfies the personal use requirement. This makes sense given the legislative history indicating Congress wanted to “ease the financial burden of car ownership for working and growing families.”

Vehicle Requirements and Verification

he vehicle must meet the basic applicable passenger vehicle criteria: new (with original use commencing with the taxpayer), U.S. final assembly, and the usual requirements like being a car, SUV, pickup truck, or similar vehicle under 14,000 pounds GVWR. The regulations provide helpful clarity on how taxpayers can verify these requirements.

For final assembly, taxpayers can rely on either the VIN decoder on the NHTSA website or the vehicle information label that’s affixed to the vehicle. This gives clients a straightforward way to confirm eligibility before making a purchase decision.

For retail purchasers, original use commences only if the loan documentation treats the vehicle as new. The regulations also address dealer demonstrators. If a dealer uses a vehicle for test drives without registering it under state law, original use hasn’t commenced, and the first retail purchaser can qualify. But if the dealer registers a vehicle to use as a service loaner, original use starts with the dealer, and subsequent purchasers are out of luck.

There’s relief for quick returns. If a customer returns a vehicle within 30 days, original use is treated as not having commenced, allowing the next purchaser to qualify.

What Debt Actually Qualifies

Beyond the vehicle purchase price itself, the loan can include items customarily financed in vehicle purchase transactions that directly relate to the purchased vehicle. This includes extended warranties, vehicle service plans, sales taxes, and vehicle-related fees.

Negative equity from trade-ins doesn’t qualify. The regulations provide a helpful example: a client finances $50,000, trades in a car with $6,000 negative equity, and makes a $4,000 down payment. The down payment is applied against the negative equity first, so $48,000 of the loan qualifies and only $2,000 doesn’t. This ordering rule works in the taxpayer’s favor by minimizing the disqualified portion.

The Income Phaseout

The deduction phases out quickly for higher-income taxpayers. It reduces by $200 for each $1,000 of modified adjusted gross income over $100,000 for most taxpayers, or $200,000 for joint filers. The math is harsh. A single taxpayer with $150,000 of AGI has a $50,000 excess, which means 50 increments times $200, completely eliminating the $10,000 deduction. Anyone over $150,000 AGI (or $250,000 joint) gets nothing.

This phaseout limits the deduction’s as usual – regular AGI plus any excluded foreign earned income under sections 911, 931, or 933. For estates and non-grantor trusts, the phaseout applies at the entity level using adjusted gross income as defined in section 67(e), not based on beneficiaries’ income.

Business Use Vehicles

The regulations address what they call “independently deductible interest” – interest that qualifies as both qualified passenger vehicle loan interest and as business interest expense. You have to pick one; you can’t claim both.

For self-employed taxpayers, claiming vehicle interest as a business expense is almost always better. Consider a self-employed consultant with $150,000 of net Schedule C income who pays $3,000 in vehicle loan interest and uses the vehicle 60% for business. If they try to claim this as personal qualified passenger vehicle loan interest, they’re already completely phased out at $150,000 of AGI. The deduction is worth exactly zero.

But if they claim $1,800 as business interest expense (60% of $3,000), they reduce their Schedule C income to $148,200. This reduces adjusted gross income by $1,800, which saves approximately $270 in self-employment tax (15% of $1,800) plus the income tax savings on that $1,800. The total benefit is substantially better than claiming it as personal interest.

Even for lower-income self-employed taxpayers who aren’t phased out of the personal deduction, business interest reduces AGI, which has cascading benefits. It lowers self-employment tax, helps preserve the qualified business income deduction, and affects various AGI-based credits and phaseouts. For clients receiving health insurance subsidies, that AGI reduction can be particularly valuable.

Refinancing and Changes in Obligor

The regulations clarify that refinanced loans qualify as specified passenger vehicle loans only up to the outstanding balance at the time of refinancing. Any additional borrowing beyond that balance isn’t part of the SPVL. Generally, if there’s a change in obligor, the loan loses its qualified status. The exception is for changes by reason of death. The regulations provide detailed rules allowing estates, surviving joint owners, designated beneficiaries, and heirs or legatees to step into the deceased obligor’s shoes and continue claiming the deduction.

Information Reporting Requirements

Beginning in 2026, lenders have new reporting obligations under §6050AA. If they receive $600 or more of interest on a specified passenger vehicle loan during a calendar year, they must file an information return with the IRS and furnish a statement to the borrower. They can voluntarily report lesser amounts if they choose.

The required information is comprehensive – borrower name, address, and taxpayer identification number; the amount of interest received for the year; outstanding principal at the beginning of the year; loan origination date; year, make, model, and VIN of the vehicle; and for assignees, the date the loan was acquired. The statement furnished to borrowers must include a legend warning them that they may not be able to deduct the full amount shown due to the income limitations. The draft Form 1098-VLI, dated December 2026, is here.

Returns are due by February 28, or March 31 if filed electronically. Statements to borrowers are due by January 31. The electronic filing requirement kicks in if the lender files 10 or more returns during the year.

Who Really Benefits from This Deduction?

After working through all these rules, it becomes clear that this deduction has a fairly narrow sweet spot. W-2 employees who earn under the phaseout threshold and who are purchasing new, U.S.-assembled vehicles are the primary beneficiaries. These are taxpayers who have no other way to deduct auto loan interest and who aren’t affected by the AGI reduction benefits that make business interest more valuable.

Non-itemizers in particular get a real benefit here since they’re picking up a deduction they otherwise couldn’t claim. For someone taking the standard deduction who earns $85,000 and pays $3,000 in auto loan interest, this is real money.

On the other hand, self-employed individuals with any business use should almost certainly document that business use and claim business interest expense instead. The combination of AGI reduction and self-employment tax savings makes business interest the better choice regardless of income level. High earners over $150,000 AGI (or $250,000 for joint filers) are completely phased out and shouldn’t waste time on this deduction at all. And obviously, anyone financing used vehicles or foreign-assembled vehicles doesn’t qualify.

The Temporary Nature of This Provision

It’s worth remembering that this deduction expires after 2028. For clients considering vehicle purchases, there’s only a four-year window to take advantage of this provision. That limited timeframe means this isn’t something that will fundamentally change how we handle auto loan interest in the long term. It’s a temporary planning opportunity that requires awareness but won’t become part of our permanent tax planning toolkit.

Bottom Line for Your Practice

The practical reality is that this deduction will help a specific subset of clients: moderate-income W-2 employees purchasing new, U.S.-assembled vehicles. For your self-employed and small business owner clients, traditional business expense treatment remains superior in virtually every case. When you factor in AGI reduction and self-employment tax savings, business interest wins.