Hamill: What the IRS says about the new car loan deduction

On Dec. 31, the Treasury Department released proposed regulations interpreting the new interest deduction for automobile loans.

The Treasury has been accused of dropping unpopular rules on us late in the day, right before a weekend or, better still, a holiday.

To be fair, this release was early in the day. And the new deduction will be popular. The proposed regulations seem fairly reasonable.

Proposed regulations have no authoritative weight. They are invitations to the public to comment on the proposals.

After the comment period, the Treasury is required by the Administrative Procedures Act to develop a meaningful response to all substantive comments.

After that is all done, we will have temporary or final regulations that will have authoritative weight.

But the proposed regulations offer insight into how the government plans to interpret and enforce the new law.

First, some background. Since 1986, personal loan interest has been nondeductible. The big exception is personal residence interest.

The new tax law created another exception, this one for interest on a loan to purchase a personal-use vehicle.

The interest deduction is “for AGI,” (adjusted gross income) which means it is allowed even if you do not itemize deductions for the year.

The maximum allowed interest deduction is $10,000, and the deduction is available only for calendar years 2025 through 2028.

The proposed regulations dig into the specifics of the new deduction. They create new acronyms, none of which can be spoken.

QPVLI means qualified passenger vehicle loan interest. APV means applicable passenger vehicle.

SPVL means specified passenger vehicle loan. So, if you buy an APV using a SPVL, you can deduct the QPVLI. Got it?

Let’s start with an APV. It is a passenger vehicle purchased after 2024 for original use by the purchaser.

The APV must be intended for use on public roads and highways. It must have at least two wheels.

It must be classified as a motor vehicle under the Clean Air Act. It can be a car, a minivan, a van, an SUV, a pickup truck, or a motorcycle.

Original use means not a “used” car. The vehicle may have been used by the dealer for test drives or as a courtesy car.

If someone buys the vehicle and returns it to the dealer within 30 days, the second buyer qualifies as the original purchaser.

The vehicle can be titled in an individual’s name, a “grantor” trust, an estate, or a non-grantor trust.

This allows an individual to buy the vehicle and if that individual dies, his estate or an irrevocable trust can then take over ownership without loss of the deduction.

The buyer’s intent for use of the vehicle at the time of purchase determines if it qualifies for personal use.

The APV must have final assembly in the U.S. and the SPVL must be secured by a first lien on the vehicle.

The taxpayer will use Schedule 1-A to report the interest deduction. This schedule is also used to report the vehicle identification number.

The VIN has 17 characters. The eleventh character identifies the plant of manufacture. The first character identifies the country.

IRS can then use the VIN to determine if you bought an APV. You can also use the final assembly point on the label affixed to the vehicle.

Schedule 1-A is new and is used to report gimmicky tax deductions that will go away after 2028.

This includes no tax on tips, no tax on overtime, no tax on vehicle loans, and the senior deduction.

Each Schedule 1-A deduction springs to life in 2025 and has a current death sentence of December 31, 2028. (This refers to the senior deduction, not the senior).

Some vehicles are not APVs. This includes commercial vehicles, leased vehicles, and vehicles with a salvage title or that are bought for parts.

The lender must report the interest received from the SPVL. This includes detailed information about the borrower and the vehicle.

The IRS will need to toss extra coal in the boiler of its antiquated computer systems so it can match the reported information on the SPVLs to the borrower’s return.

The maximum $10,000 annual deduction phases out above $100,000 of income ($200,000 married filing joint) and is lost at $150,000 or $250,000 of income.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.