Car Loan Interest Deductions and What's Changing This Year

In 2025 a long-absent tax benefit makes its return: the ability for individuals to deduct interest on certain personal-use car loans. The change, enacted through the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), reopens a narrow personal-interest deduction that has been closed since the Tax Cuts and Jobs Act of 2017.

To guide implementation, the IRS issued Notice 2025-57, providing transitional relief and compliance instructions for lenders. Here’s what’s changing, how it impacts taxpayers and financial institutions, and what steps to take before the 2026 filing season.

Background: The Return of Personal Vehicle Interest Deductions

Under OBBBA, IRC §163(h) now allows individuals to deduct up to $10,000 of qualifying vehicle-loan interest (VLI) each year for tax years 2025 through 2028.

The deduction applies only to, “specified passenger vehicles” new personal-use cars, SUVs, pickup trucks, minivans, or motorcycles with a gross vehicle-weight rating less than 14,000 lbs that underwent final assembly in the United States. The intent is to provide modest, targeted relief for middle-income taxpayers facing higher financing costs.

Who Qualifies and What’s Covered

To qualify for the new deduction:

The vehicle must be new and assembled in the U.S.
The loan must be secured by a first lien on that vehicle and originated after December 31, 2024.
The statute requires the original use of the vehicle to begin with the taxpayer ; vehicles previously used by another owner may be disqualified (guidance is pending)The taxpayer must report the VIN on their return using Schedule 1-A.
The deduction phases out starting at MAGI of $100,000 (single) / $200,000 (joint) and is eliminated entirely when MAGI reaches [~$150,000 single / $250,000 joint] (subject to final regulations).The deduction is available whether or not the taxpayer itemizes.

Additional Notes:

Refinances: Although some commentary suggests refinanced loans may retain eligibility, the statute is unclear on refinances and taxpayers should wait for IRS guidance before relying on this treatment.
Verification: The VIN’s plant code can confirm U.S. assembly via the NHTSA VIN Decoder.
Not eligible: used or leased vehicles, vehicles assembled outside the U.S., or any loan primarily for business or fleet use.

New IRS Reporting Framework

Draft Form 1098-VLI (Vehicle Loan Interest Statement): Beginning with 2026 filings, lenders that receive $600 or more in interest from an individual on a qualified vehicle loan must file Form 1098-VLI with the IRS and furnish it to the borrower (as of this writing, the IRS has not yet released final forms).

Each form must include:
-Borrower’s name and address
-Total VLI received
-Loan origination/acquisition dates
-Vehicle year, make, model, and VIN
-Outstanding principal and any other data the IRS requires

Draft Schedule 1-A (Form 1040): Taxpayers will claim the deduction and report the VIN on this new attachment to Form 1040. (Both forms remain in draft status as of late 2025.

Transitional Relief for 2025: IRS Notice 2025-57: According to recent IRS guidance, summarized by both EY Tax Alert 2025-2171 and PwC Tax Insight, October 2025, lenders are not required to file Form 1098-VLI for calendar year 2025.

Instead, they may satisfy §6050AA by providing borrowers with a statement showing total 2025 interest by January 31, 2026 through:

A secure online portal,
A monthly or annual statement, or
Another comparable written method.

If lenders meet this requirement, no penalties under IRC §§6721 or 6722 will apply for 2025. The IRS encourages lenders to use this period to obtain borrower consent for electronic delivery and begin aligning internal systems for full 1098-VLI reporting in 2026.

Impact on OBBBA Compliance and Tax Planning

For Lenders and Financial Institutions

Transitional relief covers 2025 only; formal electronic filing begins in 2026.
System updates should capture VINs, classify qualifying loans, and store borrower e-consents.
Reporting threshold: Applies when total annual interest received ≥ $600.
Scope clarity: Used, leased, or business-use vehicles are excluded from the reporting regime.

For Taxpayers and Advisors

Deduction window: Up to $10,000 of VLI per year, 2025 – 2028.
Documentation is key: Keep the lender statement, verify final assembly, and ensure the VIN appears on the return.
Strategic timing: Financing a qualifying new vehicle in early 2025 could yield a direct above-the-line deduction.
Refinance planning: A compliant refinance continues to qualify if the vehicle and lien terms remain within OBBBA parameters.

What Taxpayers Should Do Before 2026

Confirm vehicle eligibility: check the VIN for U.S. assembly.
Coordinate with your lender: ensure you’ll receive a 2025 interest statement.
Track interest paid: reconcile lender statements with your records.
Consult your advisor: evaluate whether this deduction or a business-use strategy provides greater after-tax benefit.

Aura Advisors’ Perspective

The OBBBA’s vehicle-loan interest deduction introduces a blend of relief and responsibility. Taxpayers gain a valuable new deduction, while lenders face fresh information-reporting standards. The IRS’s transitional relief for 2025 offers breathing room, but preparation now will prevent compliance stress later.

At Aura Advisors, we help clients understand complex IRS updates and turn them into practical strategies. From personal vehicle purchases to business reporting systems, our team guides you toward compliant, forward-looking tax solutions that fit your goals.

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Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.

Car Loan Interest Deductions: What They Are and What’s Changing