An Overview of the Car Loan Interest Deduction

The "no tax on car loan interest" provision is more complex than many realize

§70203 of the One Big Beautiful Bill Act (OB3 Act) added a new deduction for qualified passenger vehicle loan interest (QPVLI) of up to $10,000 per tax year in new §163(h)(4). It does not reduce adjusted gross income (AGI), but it does reduce taxable income (i.e., a below-the-line deduction).

Individuals, decedent estates, and non-grantor trusts may deduct QPVLI. Individuals who are itemizers or non-itemizers claim it on the new Schedule 1-A. It is a temporary deduction available for tax years beginning after December 31, 2024, but it terminates for tax years beginning after December 31, 2028.

Treasury recently issued Prop. Treas. Reg. §1.163-16 to provide guidance on the deduction.

Qualified Passenger Vehicle Loan Interest Defined

QPVLI is paid on a specified passenger vehicle loan (SPLV) incurred after December 31, 2024 to purchase an applicable passenger vehicle (APV) for personal use. A first lien on the vehicle must secure the loan. The term does not include loans for commercial vehicles not used for personal purposes, loans for purchasing a vehicle with a salvage title, loans for vehicles intended for scrap or parts, or lease financing.

Refinancing loans qualify to the extent they do not exceed the original loan amount, but loans to §267(b) and §707(b)(1) related parties do not qualify.

Applicable Passenger Vehicle Defined

An APV is a vehicle that meets the following requirements:

• Final assembly occurred within the United States,

• The original use commenced with the taxpayer (i.e, the taxpayer is the first person that takes delivery of the vehicle after it is sold, registered, or titled),

• It is manufactured primarily for use on public streets, roads, and highways,

• It has at least two wheels,

• It is a car, minivan, van, SUV, pickup truck, or motorcycle,

• It is treated as a motor vehicle for purposes of Title II of the Clean Air Act, and

• It has a gross vehicle weight rating of less than 14,000 pounds.

In Fact Sheet 2025-03, the IRS stated that a taxpayer can determine that final assembly occurred in the United States from:

• The vehicle information label that is attached to each vehicle on a dealer’s premises, or

• The vehicle’s plant of manufacture, as reported by the vehicle identification number (VIN) using the federal government’s VIN Decoder website.

Personal Use Defined

Under the proposed regulation, a taxpayer is considered to purchase an APV for personal use if, at the time the debt is incurred, they expect that the APV will be used for personal use by the taxpayer who incurred the debt, or by certain members of that taxpayer’s family and household, for more than 50% of the time.

When a decedent's estate or non-grantor trust incurs debt to purchase an APV, the personal use determination is based on the expected personal use by one or more of the legatees or heirs, or beneficiaries, respectively, who have a present or future interest in that decedent's estate or non-grantor trust; the spouse of a legatee, heir, or beneficiary; or a certain individuals related to a legatee, heir, or beneficiary.

A taxpayer is not required to reevaluate personal and nonpersonal use in tax years after the debt is incurred to determine future eligibility.

Allocating Interest

Interest that is deductible under another Code section (i.e., interest allocable to business use) can be deducted either under that provision or as QPVLI; however, a taxpayer cannot double-deduct the interest and must allocate on Schedule 1-A. The taxpayer has flexibility in allocating the interest.

Taxpayers who use the standard mileage rate to compute vehicle deductions can deduct the interest allocable to the business use in addition to the mileage rate. See Rev. Proc. 2019-46, Sec. 4.03.

Example based on Prop. Treas. Reg. §1.163-16(g)(4)(ii): During the tax year, Kip paid $12,000 in interest on an SPVL, and 30% of the APV’s use is attributable to his business. Kip may deduct up to $10,000 of the interest as QPVLI, assuming his MAGI is under the threshold. Assume Kip may deduct the full $3,600 as business interest after considering any applicable limitations.

Examples of how the $12,000 in interest can be allocated are as follows:

• Kip may deduct $10,000 of interest as QPVLI and deduct the remaining $2,000 as business interest to maximize the QPVLI deduction,

• Kip may deduct $3,600 of business interest and the remaining $8,400 as QPVLI to maximize the business deduction, or

• Kip may deduct $2,400 of business interest and the remaining $9,600 as QPVLI, perhaps to meet specific AGI and/or §199A QBI targets.

Deduction Limitations

The taxpayer must include the APV’s VIN on the tax return to claim the deduction.

A married taxpayer does not have to file a joint tax return to claim this deduction; this is different than the tips, overtime, and senior deductions. Additionally, the $10,000 limitation applies per return; therefore, a married couple can claim up to $10,000 in deductions on each separate return, for a possible total deduction of $20,000.

The amount allowed as a deduction (after application of the $10,000 limit) is reduced, but not below $0, by $200 for each $1,000 that the taxpayer’s modified AGI (AGI plus the §911, §933, and §935 exclusions) exceeds $100,000 ($200,000 on a joint return). Fractional amounts do reduce the deduction; this is different than the tips and overtime deduction phase-outs.

The $10,000 limit is applied before the phase-out; the maximum $10,000 deduction amount will entirely phase out at a MAGI of $150,000 ($250,000 on a joint return).

Example based on Prop. Treas. Reg. §1.163-16(h)(3)(ii): Rose is an individual who paid $7,000 of QPVLI on an SPVL during the tax year. She is single with a MAGI of $124,200 for the tax year.

The maximum amount of QPVLI that Rose can deduct is $2,000. Her MAGI exceeds $100,000 by $24,200; therefore, the $7,000 amount must be reduced by $5,000, which is equal to $200 × 25 ($24,200 / $1,000 = 24.2 (rounded up to 25)).

Information Return Reporting

New §6050AA requires that $600 or more of QPLVI paid in a tax year be reported on an information return. Starting in tax year 2026, Form 1098-VLI, Vehicle Loan Interest Statement, will report the QPLVI paid during the tax year.

In Notice 2025-57, the IRS provided transitional relief for the new information return requirement for tax year 2025. Lenders will meet their reporting obligations if they make a statement available to the buyer indicating the total amount of interest.

Specifically, lenders can meet their reporting requirements by making this total amount of interest available:

• On an online portal that the buyer can easily access,

• In a regular monthly statement,

• On an annual statement that is provided to the buyer, or

• By other similar means designed to provide accurate information to the buyer regarding interest received.

Sample Personal Use Statement

Tom’s Tax Toolbox has a sample statement that tax professionals can have their clients sign to document their personal use intent at the time of vehicle purchase.

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