On Dec. 31, 2025, the Internal Revenue Service issued Information Release 2025-129 promulgating proposed regulations on the new car loan interest deduction. The proposed regulations expand on Notice 2025-57, issued on Oct. 21, 2025.
Processing Content
The basics of the car loan interest deduction is that it must be a new vehicle assembled in the United States, with the loan being a first lien on the vehicle. The deduction has an annual limit of $10,000, which is expected to be sufficient to cover most vehicle loans. Eligibility for the deduction starts to phase out at modified adjusted gross income of $100,000 ($200,000 of MAGI for joint filers) at a rate of $200 for each $1,000 (or portion thereof) over the threshold.
The deduction is to be claimed on Schedule 1-A of Form 1040. It is a below-the-line deduction available to both itemizers and nonitemizers. The proposed regulations use the term “Qualified Passenger Vehicle Loan Interest.”
Vehicle eligibility
The original use of the vehicle must begin with the taxpayer. The vehicle must weigh less than 14,000 pounds. It must be used more than 50% for personal use — although, if that requirement is met, the interest associated with the business use of the vehicle can be claimed either as part of the car loan interest deduction or as a business expense. The vehicle must be designed for personal use on the road and can include two-wheeled vehicles such as motorcycles. The proposed regulations use the term “Applicable Passenger Vehicle.”
Whether assembly occurs in the U.S. can be determined using the vehicle identification number at www.nhtsa.gov/vin-decoder. VIN numbers beginning with 1, 4, 5, 7F-7Z and 70 can indicate U.S. assembly.
Qualifying loans
The loan must be a first loan for personal use. Later tax liens do not create a problem. The loans cannot be for fleet sales, commercial vehicles, leases, or vehicles sold for salvage, scrap or parts. It cannot be a related-party loan. Refinancing the loan does not create an issue so long as it is limited to the outstanding death and there is no change in the obligor, except for death.
It can include items customarily financed, such as service plans, warranties, sales taxes and fees. It cannot include vehicle insurance, extended warranties, cash-out proceeds, or negative equity on an existing trade-in vehicle loan.
David Paul Morris/Bloomberg
The proposed regulations provide an example of the role of negative equity: If a vehicle loan has $50,000 of indebtedness, a $4,000 down payment, and $6,000 of negative
equity, the qualifying loan amount is $48,000 ($50,000 minus ($6,000 minus $4,000)). The proposed regulations use the term “Specified Passenger Vehicle Loan.”
Personal use
The obligor on the loan must be an individual, descendent’s estate, nongrantor trust, owner of a grantor trust, or a disregarded entity of the obligor. It must be used for personal use more than 50% of the time. This percentage is determined only when the debt is issued, not by subsequent events.
Phase-out threshold
The $10,000 maximum deduction starts to phase out at modified adjusted gross income of $100,000 ($200,000 for joint filers). It phases out at a rate of $200 for each $1,000 (or portion thereof) over the threshold.
The “portion thereof” language indicates that the phase-out would be complete at MAGI of $149,001 ($249,001 for joint filers). For estates, the $100,000 figure applies at the estate level, not the beneficiary level.
Reporting vehicle loan interest
Notice 2025-57 had indicated that lenders will not be subject to penalties for failure to report car loan interest for 2025 to the IRS. For 2025, lenders should provide information to obligors on their own lender statements.
Starting for tax years 2026, lenders will be required to report car loan interest of $600 or more per vehicle on Form 1098 VLI. The form is required to be submitted to the recipient by Jan. 31 of the following year and to the IRS by Feb. 28 of the following year (March 31 if filing electronically).
Schedule 1-A
Part IV of Schedule 1-A provides a calculation of the car loan interest deduction. The VIN is to be entered for each loan, together with the amount of interest paid on the loan for the year. This amount is then compared to the $10,000 limit. The result is then applied to the income phase-out, if any. The resulting calculation is then advanced, along with the results from other Schedule 1-A deductions, to Form 1040, Line 13b.
Coming developments
Written or electronic comments on the proposed regulations are due by Feb. 2, 2026, with a public hearing scheduled for Feb. 24, 2026. It is possible that final regulations might be issued during the tax filing season.
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