Final car loan interest rules put the reporting work on lenders

Section 163(h)(4) of the tax code now allows individuals a deduction for interest on loans used to buy certain passenger vehicles. On 8 September 2026 the IRS and Treasury published final regulations on how it works (91 FR 57214). Most of the text is about the borrower's deduction. The part that matters to a bank or credit union is the new information reporting obligation under section 6050AA.

The final regulations take effect on 9 November 2026.

The deduction in brief

The deduction "cannot exceed $10,000" of qualified passenger vehicle loan interest a year, and it "applies solely to taxable years beginning after December 31, 2024, and before January 1, 2029." It phases out by "$200 for each $1,000 (or portion thereof)" of modified adjusted gross income above $100,000, or $200,000 for joint filers.

The loan must be incurred after 31 December 2024 "for the purchase of, and that is secured by a first lien on," an applicable passenger vehicle. The vehicle must have "undergone final assembly in the United States," and its original use must start with the borrower. Two details that will catch people out: debt for negative equity rolled into the loan "is not incurred by a taxpayer for the purchase" of the vehicle, so that slice doesn't qualify; and a vehicle bought on a credit card generally isn't secured debt, so that interest doesn't qualify either.

The lender's job

A person in a trade or business that receives "interest aggregating $600 or more for any calendar year" from an individual on a qualifying loan must file an information return and give the borrower a statement. The form is Form 1098-VLI, "Vehicle Loan Interest Statement."

The final rules put the qualification question on the lender. The IRS declined to "adopt a safe harbor for interest recipients" on whether a vehicle meets the statutory tests, so a dealer's say-so does not settle it. Where a loan mixes qualifying and non-qualifying amounts, such as negative equity, interest is "allocated on a pro rata basis" between them, and the final regulations "do not provide for any other allocation method." The preamble acknowledges that "specific interest recipients, including credit unions, do not currently track all the information necessary" to make those allocations.

For 2025 there was relief. Under Notice 2025-57, an interest recipient is "deemed to have satisfied the reporting obligations under section 6050AA" for 2025 if it makes a statement of total 2025 qualifying interest available to the borrower.

What it could mean

For an auto-heavy credit union this is the biggest compliance item of the autumn, and most of the work is about data. We think two fields will cause most of the pain: where the vehicle had its final assembly, and how much of the amount financed was negative equity. We suspect some loan origination systems hold the negative equity figure only inside a scanned retail installment contract, if at all.

Take a typical indirect deal: a $38,000 new pickup, financed in full, with $4,000 of negative equity rolled in, so $42,000 financed. Only the purchase portion qualifies. About 90 percent of each year's interest ($38,000 of $42,000) is qualifying interest, and that share is what gets tested against the $600 threshold and reported. Your core probably doesn't do that calculation today.

Our suggestion is to treat the 2025 relief as the dry run it was, and plan for full Form 1098-VLI reporting for 2026 loans. Work with your indirect dealers now on what data comes through with the contract, ask your core and LOS vendors when allocation logic will be ready, and decide what you'll do for loans where you can't establish final assembly. Borrowers will probably start asking where their form is early in 2027, which is a bad time to find a missing field.