IRS proposes guidelines for the new “No Tax on Car Loan Interest” deduction

A new federal tax benefit is set to change how many taxpayers think about car loan interest. On Dec. 31, 2025, the Department of the Treasury and the IRS issued guidance in the form of proposed regulations for a new deduction sometimes described as “No Tax on Car Loan Interest.” The proposal implements a provision enacted under the One Big Beautiful Bill Act and creates a temporary deduction for certain taxpayers who pay interest on qualifying passenger vehicle loans.

For tax professionals, the new rules raise practical questions: Who qualifies? Which loans count? How much interest is deductible? What documentation will taxpayers need to substantiate the deduction? The proposed regulations also include new lender reporting requirements designed to support taxpayer claims and reduce compliance gaps.

The basic idea: a temporary deduction for qualified car loan interest

The proposed regulations describe a new deduction for qualified passenger vehicle loan interest. It generally allows taxpayers to deduct interest paid on certain vehicle loans incurred after Dec. 31, 2024, to purchase new made-in-America vehicles for personal use. The deduction is available for taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029.

Unlike most interest-deductibility rules for individuals, this provision creates a specific exception for vehicle loan interest that would otherwise be nondeductible personal interest. The proposed regulations explain that the allowance is tied to new statutory language added to §163, added under OBBBA, which generally permits deductions for interest but disallows most personal interest for taxpayers other than corporations. The new exception inserts qualified passenger vehicle loan interest into the list of allowable interest deductions for the covered years.

Who can claim it: itemizers and non-itemizers

One of the most taxpayer-friendly features of the proposal is that the benefit is not limited to itemizing taxpayers. The proposed regulations allow taxpayers who take the standard deduction to still claim the deduction attributable to this new car loan interest exception. In other words, the new deduction is designed to work above the line for non-itemizers as well as those who itemize.

This means practitioners should be prepared to evaluate eligibility for a wide range of clients rather than assuming the benefit applies only to itemizing taxpayers.

How much is deductible: the $10,000 annual cap

While this new benefit is significant, it is not unlimited. The IRS announcement notes the guidance clarifies the $10,000 annual deduction limit. The proposed regulations are intended to identify which taxpayers can claim the deduction and how the annual limitation applies.

This cap means tax professionals will need to pay attention to loan amortization schedules, year-end interest totals, and the timing of purchase and payments. Some taxpayers may reach the cap quickly depending on loan size, interest rate and payment timing.

How the car loan interest deduction works

Here is a basic example to illustrate how the deduction could apply.

A taxpayer buys a new vehicle that meets the made-in-America final assembly requirement and finances the purchase with a qualifying loan secured by a first lien. The taxpayer pays $3,200 in interest to the lender during the year. If the taxpayer meets the requirements and the interest is qualified passenger vehicle loan interest, the taxpayer may be able to deduct the full $3,200 because it is below the $10,000 annual cap.

Now assume the taxpayer pays $12,400 in interest for the year. In that situation, the taxpayer generally could not deduct the full amount. Instead, the deduction would be limited to $10,000 for the year, with the remaining $2,400 treated as non-deductible interest under the proposed limitation.

The applicable interest deduction (limited to $10,000) will lower the taxpayer’s adjusted gross income.

Final car assembly makes a difference

Eligibility hinges not only on the loan and the taxpayer but also on whether the vehicle qualifies. The proposed regulations define an “applicable passenger vehicle” as a vehicle that meets statutory requirements. Importantly, the definition excludes vehicles whose final assembly did not occur in the United States. The IRS guidance also provides direction for determining whether final assembly occurred in the United States.

The loan must qualify and it must be secured by a first lien

The statute-based definition of qualified passenger vehicle loan interest is narrow. Under the proposed rules, the interest must be paid or accrued on indebtedness incurred after Dec. 31, 2024, for the purchase of the vehicle and it must be secured by a first lien on that applicable passenger vehicle for personal use, subject to certain exceptions.

This requirement makes the structure of the loan agreement essential. Taxpayers who finance a purchase through nontraditional means or who do not have a loan secured by a first lien on the vehicle may not qualify. The IRS guidance also indicates that the proposed regulations provide rules for determining which vehicle loans qualify and for determining the amount of interest that may be deductible.

Personal use requirement: not a business deduction

The proposed guidance provides rules for determining if the new vehicle is purchased for personal use. This distinction will matter to clients who use a vehicle partly for personal use and partly for business. Practitioners should anticipate questions about mixed-use situations and what qualifies as personal use under the new rules, especially for clients who may otherwise expect to deduct vehicle-related costs through a business.

Lender reporting: new information returns  

A major compliance component of the proposed guidance is new information reporting for lenders and others receiving qualifying interest. The proposed regulations describe rules implementing §6050AA, which generally requires persons engaged in a trade or business who receive from an individual interest totaling $600 or more for the year on a specified passenger vehicle loan to file an information return.

The information return must include:

• Taxpayer identifying details
• Loan-related information (vehicle’s year, make and model, VIN) 
• Date of origination and principal balance information

Lender reporting is intended to provide documentation that supports the taxpayer’s deduction claim and standardizes what information is available.

What to watch for next

These rules are not final yet. Treasury and the IRS invited public comments on the proposed regulations by Feb. 2, 2026, and announced a public hearing on Feb. 24, 2026. This means the final regulations could evolve, particularly regarding definitions of qualifying vehicles, the handling of refinancing and the practical reporting process for lenders.

Practical takeaway for tax professionals

For practitioners, the most important steps will be:

• Verify the vehicle meets the made-in-America final assembly requirement.
• Confirm the loan is a qualifying purchase loan secured by a first lien.
• Ensure the vehicle is purchased for personal use.
• Track interest paid during the year (up to the $10,000 annual cap).
• Obtain lender-reported information that supports the deduction.

If the proposal is finalized largely as written, the car loan interest deduction will become a high-visibility benefit with broad reach. It will also require careful review of facts, documentation and reporting support to claim properly.