Section 70203 of Public Law 119-21 added a deduction for interest on a loan used to buy a new passenger vehicle, built into section 163(h)(4). The interest is excluded from "personal interest" for taxable years beginning after December 31, 2024 and before January 1, 2029. The deduction is capped at $10,000 a year, shrinks by $200 for each $1,000 of modified adjusted gross income above $100,000 ($200,000 on a joint return), and requires the vehicle identification number (VIN) on the return. The IRS says clients can claim it whether or not they itemize.
For 2026 returns the questions a preparer faces are which loans qualify, how the phase-out works, and what the client must bring to the file.
Which loans qualify?
Under section 163(h)(4)(B)(i), qualified passenger vehicle loan interest is interest paid or accrued during the year on debt the taxpayer incurred after December 31, 2024 to buy an applicable passenger vehicle for personal use, where the debt is secured by a first lien on the vehicle.
The statute excludes:
- Loans to finance fleet sales
- Loans for commercial vehicles not used for personal purposes
- Lease financing
- Loans for vehicles with a salvage title
- Loans for vehicles intended for scrap or parts
Debt owed to a related person under section 267(b) or 707(b)(1) does not qualify (section 163(h)(4)(E)(iii)). Refinanced debt qualifies if it is secured by a first lien on the same vehicle, but only up to the refinanced amount (section 163(h)(4)(E)(ii)).
Which vehicles count?
An applicable passenger vehicle under section 163(h)(4)(D) is a vehicle that:
- Has its original use begin with the taxpayer, which is why the IRS states that used vehicles do not qualify
- Is made primarily for use on public streets, roads and highways
- Has at least 2 wheels
- Is a car, minivan, van, sport utility vehicle, pickup truck or motorcycle
- Is treated as a motor vehicle under title II of the Clean Air Act
- Has a gross vehicle weight rating under 14,000 pounds
A vehicle whose final assembly did not occur within the United States is excluded. Section 163(h)(4)(E)(i) defines final assembly as the process by which a manufacturer produces a vehicle at a plant or other place from which it is delivered to a dealer with all component parts necessary for mechanical operation included. The IRS tells taxpayers to check the vehicle information label on the vehicle, or the plant of manufacture coded in the VIN with the federal VIN decoder.
How does the phase-out work?
Section 163(h)(4)(C)(i) limits qualified interest to $10,000 per taxable year. Subparagraph (C)(ii) reduces the otherwise allowable amount, but not below zero, by $200 for each $1,000 (or portion of $1,000) by which modified adjusted gross income exceeds $100,000 ($200,000 on a joint return). Modified adjusted gross income is adjusted gross income increased by amounts excluded under sections 911, 931 or 933.
Because the reduction runs at $200 per $1,000, a full $10,000 deduction is gone once MAGI is $50,000 above the threshold. For interest below $10,000, the deduction disappears sooner.
Worked example 1 (single filer). A client financed a new, U.S.-assembled SUV in 2026 and paid $6,500 of interest during the year. MAGI is $118,200.
- MAGI over threshold: $118,200 - $100,000 = $18,200.
- Units of $1,000 or portion: 19 (the portion counts as a full unit).
- Reduction: 19 x $200 = $3,800.
- Deduction: $6,500 - $3,800 = $2,700.
Worked example 2 (joint filers). The couple's MAGI is $196,000 and they paid $12,000 of qualified interest. The threshold is $200,000, so no reduction applies. The $10,000 limit applies: the deduction is $10,000, and $2,000 of interest produces no benefit.
Worked example 3 (no benefit). A single client with MAGI of $155,000 paid $9,000 of interest. Excess = $55,000, so 55 units and a $11,000 reduction. The reduction exceeds the interest and the deduction is zero.
What does the client need to bring?
The statute requires the VIN on the return for the year, and the IRS says the VIN is required for every year the deduction is claimed. Build a standing checklist for each financed vehicle:
- Loan agreement and date. The debt must be incurred after December 31, 2024. For a refinance, record the refinanced amount, because qualifying debt covers refinancing debt only up to that amount.
- Purchase documents. The window sticker or bill of sale showing a new vehicle, with the original use beginning with the client.
- Final assembly evidence. The vehicle information label or the VIN plant code.
- Lien proof. Title or lienholder record showing a first lien.
- Annual interest statement. The IRS says lenders and other recipients of qualified interest must file information returns with the IRS and give taxpayers a statement of total interest received for the year, and that transition relief applies for 2025. Where a lender statement is missing, use the loan payment history and keep it with the file.
- Use test. A note that the vehicle was bought for personal use. The statute excludes loans for commercial vehicles not used for personal purposes.
- Related-party check. Confirm that the lender is not a person described in sections 267(b) or 707(b)(1).
What are the planning points?
- Estimated tax. The deduction does not require itemizing, so quarterly estimates and withholding for a client who has just financed a vehicle should be revisited. See estimated tax safe harbors.
- Interaction with other limits. Clients who itemize and those who take the standard deduction can both claim it, so it sits alongside the other individual limits. See the itemized deduction limitation for top-bracket clients and the SALT cap changes for the other income-based limits in the same act.
- Sunset. The provision covers taxable years beginning before January 1, 2029. A vehicle financed in 2028 yields interest deductions only through the 2028 year.
- Other 2025 legislation items. Raise this with the rest of the new individual provisions, such as the enhanced deduction for seniors, at the same client meeting.
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Sources
- Cornell Law School Legal Information Institute, 26 U.S.C. 163, including (h)(4): https://www.law.cornell.edu/uscode/text/26/163
- Internal Revenue Service, Purchasing a new vehicle? Car loan interest could be eligible for a tax deduction: https://www.irs.gov/newsroom/purchasing-a-new-vehicle-car-loan-interest-could-be-eligible-for-a-tax-deduction
- Internal Revenue Service, Working Families Tax Cuts: Tax deductions for working Americans and seniors: https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
- U.S. Government Publishing Office, Public Law 119-21 (table of contents, section 70203): https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
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