Advocates for dealers and auto lenders are disappointed but not too surprised at the final rule published Sept. 8 by the Internal Revenue Service and the Department of the Treasury, spelling out the details for making interest payments tax-deductible on qualifying, new-vehicle auto loans.
“It was very disappointing for all of us,” said Philip Bohi, general counsel for the Washington-based American Financial Services Association. The association includes a large vehicle finance segment, including banks, captive finance companies, independent finance companies, and dealer-group based auto finance companies.
While the tax deduction is a positive for customer affordability, it could be more beneficial — and more in line with what was intended by Congress — if it were more inclusive, according to Bohi.
“The IRS and the U.S. Treasury should be looking to make it available to a large set of consumers,” Bohi said about the deduction, in a phone interview Sept. 14. “They should be looking for ways to make it more widely available.”
The deduction is limited to new vehicles that are built in the U.S. — defined by the IRS in the rule as those that get final assembly domestically. There’s also a cap of $10,000 annually, and lower benefits for borrowers with annual income above $100,000 for a single filer, or $200,000 for joint filers.
A notable exception
Where the final rule was particularly a letdown for the lender association — and perhaps broadly to the auto industry — was that the IRS and the U.S. Department of the Treasury refused to extend the tax deduction to apply to interest payments made when repaying negative equity on a trade-in.
Negative equity is when a borrower owes more on their trade-in than the trade-in is worth. It’s a common industry practice to allow qualified customers to finance negative equity on the trade-in, on the same retail installment sales contract as the new vehicle, along with add-ons such as vehicle service contracts. The AFSA and NADA refer to such add-ons as “voluntary protection products.”
Nearly 30% of new-vehicle purchases included negative equity on the trade-in during Q2 of 2026, and the average amount owed on a trade-in during the period was $6,884, according to an Edmunds report.
The new rule proposing “no tax on car loan interest,” was passed as part of the One Big Beautiful Bill Act on July 4, 2025. However, it wasn’t published in much detail until Dec. 31, 2025. That original version specifically excluded interest payments toward negative equity from the deduction.
At that time, the IRS also launched a comment period — from Dec. 31, 2025 to Feb. 2, 2026 — to give interested parties a chance to weigh in.
The announcement of the final rule on Sept. 8, 2026 included responses to that input. Among them, the NADA and AFSA had asked the IRS to change the language in its proposed rule, to allow payments towards negative equity to qualify for the deduction.
“For many consumers, there would be no purchase without this arrangement” — that is, the arrangement to finance negative equity in the same finance contract as the new vehicle, said Greg Evans, NADA vice president for regulatory affairs, in a comment submitted to regulators on Feb. 2, 2026.
However, the IRS and the Treasury Department turned the trade groups down on that appeal. “The Treasury Department and the IRS do not adopt these requests,” regarding negative equity, the regulators said in an announcement published in the Federal Register on Sept. 8.
More paperwork — for lenders
Having to keep track of how much interest is paid specifically toward negative equity is a new requirement on lenders, said Bohi of AFSA. “There’s never been a reason to break any of this stuff out,” he said.
Meanwhile, NADA emailed a graphic to its members in April 2026, designed to be used in social media posts, that said in part: “This deduction is a great opportunity to help save customers some money. Best of all, no extra paperwork is needed from the dealer’s side!”
To date, use of the deduction for auto loan interest payments has been relatively limited, even though the rule has been in force since the beginning of 2025 and it was available for taxpayers filing their returns in 2026, for the 2025 tax year.
According to a Department of Treasury press release dated July 2, 2026, serving as an update on the deduction, more than 1.4 million filers claimed the deduction on auto loan interest on their 2025 tax returns. The average deduction was “over $1,800,” the department said.
Out of about 16.3 million new-vehicle sales in 2025, 1.4 million represents about 8.6% of new-vehicle transactions.
