The Department of the Treasury and the Internal Revenue Service (IRS) have published in the Federal Register final regulations (TD 10054, document 2026-18219, 91 FR 57214) implementing the tax deduction for personal passenger vehicle loan interest. The deduction itself was created a year earlier by the legislation known as the “One, Big, Beautiful Bill Act” (OBBBA), signed on July 4, 2025. Now, the IRS has clarified how to use it precisely, following the review of 63 comments submitted on the proposed regulations and a public hearing held on February 24, 2026. The final regulations take effect on November 9, 2026.
Who is eligible to deduct car loan interest?
The deduction applies to interest paid or accrued on debt incurred after December 31, 2024, for the purchase of a personal-use vehicle secured by a first lien on that vehicle. The deduction can be a maximum of $10,000 per taxable year per tax return—regardless of filing status—and if a taxpayer has multiple car loans, they can combine the interest from all of them up to this limit. Importantly, taxpayers who do not itemize their deductions can also benefit from the relief; the new provision allows it to be subtracted directly from adjusted gross income (AGI). The deduction applies only to taxable years beginning after December 31, 2024, and before January 1, 2029, which practically covers the 2025–2028 tax returns.
A condition that is easy to forget: the car must be assembled in the USA
The regulations define an “applicable passenger vehicle” as a passenger car, minivan, van, SUV, pickup truck, or motorcycle purchased for personal use. However, there is a caveat that may surprise many buyers purchasing European brands in the USA: any vehicle whose final assembly did not take place within the territory of the United States is excluded from the deduction. In other words, simply buying a new car with a loan is not enough—you need to check with the dealer where the specific unit was actually assembled (the VIN allows this to be verified) before assuming that the interest will be deductible.
Income limit: whose deduction is reduced
The deduction is subject to a gradual phase-out as income increases. Under the final regulations, the deduction amount decreases by $200 for each (full or partial) $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000—and for married couples filing jointly, this threshold is $200,000. In practice, this means a single person completely loses the right to the deduction at a MAGI of approximately $150,000, and a married couple filing jointly at approximately $250,000. In the final regulations, the IRS rejected requests to raise these thresholds or to establish a separate, higher threshold for head of household filers—the law does not provide an exception for them.
What the final regulations clarified
In response to comments submitted on the January 2, 2026 proposal, the IRS clarified, among other things, the rules regarding “first liens”: a loan is still considered secured by a first lien even if its formal registration is delayed for procedural reasons, as well as in situations where the lien expires after the debt is incurred—for example, upon vehicle repossession and sale by the creditor or upon the payout of a total loss insurance claim. The final regulations also introduce a new obligation for lenders: companies and institutions that receive at least $600 in interest annually from a single individual for a car loan as part of their business will be required to file informational tax returns with the IRS containing, among other things, the VIN of the financed vehicle—under penalty of fines for failing to report or providing incorrect data.
What this means in practice
For families planning to purchase a car with a loan in the coming months, this means three things: first, it is worth asking the dealer to confirm the vehicle’s place of assembly before signing the loan agreement. Second, the amount of the deduction depends on income—at higher earnings, the benefit may be much smaller than the headline $10,000 or disappear entirely. Third, the deduction applies to interest paid since the beginning of 2025, so it may matter for this year’s tax filing—even though the implementing regulations themselves do not take effect until November. Final eligibility can be detailed, so it is advisable to consult an accountant familiar with the new rules when filing taxes.
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