IRS Issues Final Rules for New Car Loan Interest Deduction

On Sept. 8, the IRS issued regulations implementing the auto loan interest deduction created by the One, Big, Beautiful Bill Act (OBBBA). The rules take effect Nov. 9, 2026, although the deduction is already available.

The OBBBA includes a “no tax on car loan interest” provision, which allows some taxpayers to deduct interest paid on qualified passenger vehicle loans for tax years 2025 through 2028. The deduction phases out for taxpayers with an adjusted gross income over $100,000 (or $200,000 for joint filers). To qualify for the deduction, the vehicle must be new, for personal use, and assembled in America. Customers and dealers can use the government’s VIN decoder website to find where a vehicle was assembled.

The law was already in effect for 2025, when 1.4 million filers claimed the deduction. In response to NADA’s feedback, the IRS clarified that the deduction applies to interest on amounts financed for certain products purchased with the vehicle, such as GAP waiver, tire and wheel protection, and key fob replacement plans. However, the deduction does not apply to negative equity from a trade-in vehicle that is rolled into a new finance contract. The rule also establishes specific requirements for lenders to report interest information at the end of the year. A lender that receives $600 or more in applicable interest during the year must report that information to the IRS and provide a statement to the borrower. For most vehicle purchases, the lender rather than the dealership will be responsible for this reporting.

More Details:  
Issue Update: Tax Deductions Can Save Consumers Money on New Cars 
IRS OBBA Resources  
IRS Facts on “No Tax on Car Loan Interest” 
IRS Publication, “Purchased a New Vehicle?”

The foregoing is offered for informational purposes only and is not intended as tax or accounting advice.
NHADA CPA Partners