IRS Proposes Rules for the $10,000 Car Loan Interest Deduction, and Most High Earners Are Phased Out

The Treasury Department and the IRS on December 31, 2025, released proposed regulations for the new deduction of up to $10,000 a year in interest on loans for new, US-assembled personal vehicles. The rules arrive just as households begin gathering documents for 2025 returns, the first year the break applies. For many readers of this publication, the most important detail is not in the new guidance at all: the deduction phases out at income levels well below what most high-earning households report.

What changed

The deduction itself was created by the 2025 tax law known as the One, Big, Beautiful Bill Act and runs for tax years 2025 through 2028. What was missing until now was the detailed rulebook. The proposed regulations, formally published in the Federal Register on January 2, 2026, spell out which vehicles, loans and interest payments count, and they set out new information reporting duties for lenders.

According to the IRS fact sheet on the provision and EY's summary of the proposal, a qualifying loan must meet several tests:

• It was originated after December 31, 2024, and is secured by a first lien on the vehicle.
• The vehicle is a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds.
• Final assembly took place in the United States. The IRS says buyers may rely on the vehicle information label or the plant of manufacture encoded in the vehicle identification number.
• The original use of the vehicle starts with the taxpayer, so used vehicles do not qualify, and the vehicle is bought predominantly for personal use.
• Lease payments do not count. Interest on a later refinancing of a qualifying loan is generally eligible, though amounts tied to negative equity rolled in from a prior vehicle are excluded.

Taxpayers must list the vehicle identification number on the return for every year they claim the deduction. The break is available whether or not the household itemizes.

Who is affected

The deduction starts to shrink once modified adjusted gross income passes $100,000 for single filers or $200,000 for married couples filing jointly. In practical terms, that means a two-earner professional household with $350,000 of income, or a single executive at $250,000, should expect little or no benefit. The rule is a middle-income provision, and the phaseout is the headline for affluent families.

The households most likely to gain are those just under the thresholds: younger professionals early in their careers, retirees with modest taxable income, and adult children of wealthier parents who buy their own vehicles. Families that help relatives with a car purchase may want to understand whose name is on the loan, since the deduction follows the borrower who pays the interest and meets the income test.

Lenders are the other group affected. Businesses that receive $600 or more of interest on a specified passenger vehicle loan in a year must report it, including the vehicle's identification number, make, model and year. Under transition relief previously announced in Notice 2025-57, lenders must furnish borrower statements for 2025 by January 31, 2026, but are not yet required to file the matching returns with the IRS.

The after-tax math

Example, using round numbers: a single borrower with $90,000 of modified adjusted gross income finances a new, US-assembled SUV and pays $3,000 of interest in 2025. The full $3,000 is below the $10,000 cap and the borrower is under the phaseout threshold, so taxable income falls by $3,000. The federal tax saved equals that amount multiplied by the borrower's top marginal rate; at an illustrative 20% rate, it would be $600.

Now consider a married couple with $400,000 of income who pay the same $3,000 of interest. Their income is $200,000 above the joint threshold, which places them well outside the range where any deduction survives. Their after-tax cost of the loan is unchanged by the new law.

Business-use vehicles sit outside this deduction entirely. Owners who use a vehicle mainly in a trade or business continue to rely on the existing business expense and depreciation rules rather than this personal interest provision.

Points to discuss with a tax professional

• Whether a household's 2025 income lands near the $100,000 or $200,000 threshold, where timing of other income could matter.
• Whether a vehicle bought in 2025 actually meets the final assembly and first-lien requirements, which can be confirmed from the vehicle label or VIN.
• How a lender statement for 2025 reconciles with interest actually paid, particularly on loans refinanced during the year.
• For family members financing their own vehicles, whether the borrower is the person who will claim the deduction.

What to watch

Written comments on the proposal are due by February 2, 2026, and a public hearing is scheduled for February 24, 2026. Taxpayers may rely on the proposed rules until final regulations are issued, according to EY. Final rules could refine the personal-use test, the treatment of refinancing and the reporting requirements that begin in full for 2026. For most high earners, though, the income phaseout written into the statute is unlikely to change, and it will continue to determine who benefits through 2028.

After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.