The IRS has issued guidance for a new tax benefit that allows individuals to deduct interest paid on car loans for qualifying new vehicles.
This update stems from the One, Big, Beautiful Bill Act (H.R. 1), which established the new personal car-loan interest benefit referenced by the IRS.
IRS Notice 2025-57 (IR-2025-105, Oct. 21, 2025) provides transitional relief for 2025 to help lenders implement the new information-reporting requirements.
Starting in 2025, taxpayers may deduct interest paid on qualified passenger vehicle loans if the loan is incurred after Dec. 31, 2024 and the vehicle is purchased for personal use.
The deduction applies to cars, minivans, vans, SUVs, pickup trucks, or motorcycles with a gross vehicle weight rating under 14,000 pounds that are assembled in the United States and purchased for personal use.
“This new tax benefit allows certain taxpayers to deduct interest paid on a qualified passenger vehicle loan during a taxable year beginning after Dec. 31, 2024, and before Jan. 1, 2029,” according to the IRS notice. The loan must be incurred after December 31, 2024, and the vehicle must be purchased for personal use.
The deduction comes with strict limitations. Only new vehicles that undergo final assembly in the United States qualify, excluding used cars and foreign-assembled vehicles. Business vehicles are also excluded from this personal-use deduction.
Impact on Car Buyers and Lenders
The new rule affects a significant portion of the car market. According to the U.S. Bureau of Economic Analysis, more than 2.4 million new passenger vehicles were sold last year, and most were financed, underscoring how widely the change may apply.
Lenders who receive $600 or more in interest from any individual on a qualified passenger vehicle loan must now comply with new reporting requirements. Under Section 6050AA, lenders are required to furnish the total amount of qualified passenger vehicle loan interest to both the borrower and the IRS. However, the IRS is providing penalty relief for 2025 to ease the transition.
For calendar year 2025, lenders may satisfy their obligations by simply making the total amount of 2025 interest received available to borrowers—through online portals, monthly statements, annual statements, or other comparable methods—without filing information returns.
The IRS confirmed that it will not impose penalties under Sections 6721 and 6722 for lenders who meet these simplified conditions during the transition year, provided the information is accessible to borrowers by January 31, 2026.
Who Benefits from This Change
The deduction is designed to benefit middle and upper-income taxpayers who purchase new American-assembled vehicles for personal use. Unlike business vehicle purchases, which may qualify for other tax benefits, this deduction specifically targets personal vehicle financing.
The reporting structure mirrors existing mortgage interest rules, creating a familiar framework for both lenders and taxpayers. According to IRS Notice 2025-57, the agency intends to adopt reporting mechanisms similar to mortgage interest statements, helping ensure accurate documentation and taxpayer transparency.
Taxpayers who itemize deductions are expected to benefit the most, as the new rule adds another category of deductible personal interest for qualifying loans.
The $10,000 annual limit helps ensure the deduction remains targeted while offering measurable tax relief to eligible filers purchasing new vehicles assembled in the United States.
Implementation Timeline and Future Requirements
The deduction applies to taxable years beginning after December 31, 2024, and before January 1, 2029, creating a four-year window for this tax benefit. The transitional relief for 2025 gives lenders time to develop more comprehensive reporting systems.
Starting in 2026, lenders should expect more rigorous reporting requirements similar to mortgage interest reporting. The IRS has indicated that fuller compliance measures will be implemented in future tax years as the system becomes established.
The guidance represents a significant shift in tax policy toward incentivizing domestic vehicle purchases. For taxpayers considering a new car purchase, the timing of the loan and vehicle assembly location will be critical factors in maximizing this tax benefit.