The car loan interest deduction has been available to taxpayers since the One, Big, Beautiful Bill Act created it in July 2025. What nobody had until this week was a complete set of rules for who qualifies. On September 8, Treasury and the IRS published the final regulations, and the fine print is where the deduction's actual shape appears.
The final rule, published at 91 FR 57214, takes effect November 9. It allows taxpayers to deduct up to $10,000 of qualified passenger vehicle loan interest per year, whether or not they itemize, for taxable years 2025 through 2028. The deduction phases out by $200 for each $1,000 of modified adjusted gross income above $100,000 for single filers and $200,000 for joint filers. The framework was set by statute; the regulations define the edges, and the edges are sharp.
Which loans qualify
The qualifying-loan rules read like a series of exclusions. The loan must be secured by a first lien. Loans on used vehicles do not qualify. Leases do not qualify. Rolled-over negative equity from a previous car does not qualify. Refinanced loans qualify only up to the outstanding balance of the original loan.
The vehicle must be new, must have final assembly in the United States, must weigh under 14,000 pounds, and must be purchased primarily for personal use. The final rule clarifies several contested points: prior model-year vehicles can qualify if first sold to a non-dealer during the applicable period, demonstrator vehicles held by dealers do not start "original use," and personal use is determined once, when the loan is incurred, so a later change in how the car is used does not retroactively affect eligibility.
The rule also settles what can ride inside a qualifying loan. GAP waivers and insurance, mechanical repair coverage, warranties, credit insurance, sales taxes, title and registration fees, and vehicle accessories may be included in the specified loan. That list reflects arguments made by America's Credit Unions during the comment process, and the final rule adopted them. The taxpayer, not the lender, bears ultimate responsibility for the deduction claimed on a return.
The lender side carries the paperwork
The rule's heaviest provisions land on lenders. Any person who, in a trade or business, receives $600 or more of interest in a calendar year on a specified passenger vehicle loan must file Form 1098-VLI with the IRS and furnish a statement to the borrower by January 31 of the following year. The reporting requirement covers interest received in calendar years 2025 through 2028, and the borrower statement must include a legend noting that the borrower may not be able to deduct the full reported amount. Penalties for failures to file or furnish apply under the standard information-return rules.
Treasury estimates roughly 6 million qualifying new U.S.-assembled vehicle loans originate annually, and about 36,000 businesses will be subject to the reporting requirements. For lenders, that means new forms, new system logic, and a new set of borrower questions to field, all for a deduction the lender cannot claim or verify on the borrower's behalf.
The agencies declined several lender requests: no safe harbors, no extension of the transition relief that covered 2025 reporting, and no phasing of the requirements. The final rule is the rule, effective November 9, with reporting obligations already retroactive to 2025 interest.
The gap between the promise and the conditions
The deduction's political framing was generous: relief for car buyers. Its regulatory shape is narrower. A taxpayer who bought a used car, leased, financed a vehicle assembled outside the United States, or took a loan without a first lien gets nothing. A taxpayer who meets every vehicle test still faces the income phase-out, which begins cutting the deduction at $100,000 of modified adjusted gross income for single filers.
The eligibility conditions also interact in ways that will surprise borrowers who read only the headline. A new car assembled in the United States, financed with a first lien, driven for personal use, qualifies. Change one element, and the $10,000 figure becomes irrelevant. The January statement lenders must send will carry the deduction's actual message, printed in the legend the rule requires: the amount reported may not be the amount deductible.
For tax preparers, the practical work is triage: most clients with car loans will not qualify, and the ones who do will need the vehicle, loan, and income tests documented. For everyone else, the rulebook published Monday is the first complete answer to a question taxpayers have been asking since July 2025, and the answer is more conditional than the deduction's name suggests.
Primary sources
- Federal Register notice 91 FR 57214, "Car Loan Interest Deduction" (TD 10054).
- America's Credit Unions for the provisions adopted from industry comments.
- CUToday for the lending-industry reporting analysis.