Treasury and IRS Provide Guidance on No Tax on Car Loan Interest Provision

On December 31, 2025, the Department of the Treasury and the Internal Revenue Service (IRS) released guidance on the No Tax on Car Loan Interest provision, a key component of the One, Big Taxcut Act. This provision aims to provide relief to consumers by excluding interest paid on new car loans from federal income taxation.

Background

The No Tax on Car Loan Interest provision was enacted under Section 135 of the One, Big Taxcut Act. The provision applies to new car loans made after January 1, 2026, and is designed to reduce the burden of debt for consumers who are purchasing a new vehicle.

Guidance from Treasury and IRS

To ensure compliance with the No Tax on Car Loan Interest provision, the Treasury Department and the IRS have issued guidance on how this provision applies in practice. The guidance provides clarity on several key issues, including:

Eligibility

The No Tax on Car Loan Interest provision only applies to new car loans made after January 1, 2026. If a loan is made before January 1, 2026, the interest paid on that loan is still subject to federal income taxation.

Exclusion from Gross Income

Interest paid on a new car loan is excluded from gross income for federal income tax purposes. This means that consumers will not have to report this interest as income when filing their tax returns.

Reporting Requirements

Although the interest itself is excluded from gross income, lenders are still required to report the amount of interest paid on a new car loan on Form 1098-E. This form is used by lenders to provide information about the interest and other payments made on a loan to the borrower.

Record Keeping Requirements

Lenders must maintain records of all interest paid on new car loans, as well as all other payments made on the loan. These records can be used to support the exclusion of interest from gross income when filing tax returns.

Key Takeaways

The No Tax on Car Loan Interest provision provides an important relief to consumers who are purchasing a new vehicle. The guidance issued by the Treasury Department and the IRS ensures that lenders understand their responsibilities under this provision, while also providing clarity for consumers about how this provision applies in practice.

To ensure compliance with the No Tax on Car Loan Interest provision, lenders should:

• Only apply the provision to loans made after January 1, 2026
• Exclude interest paid on new car loans from gross income
• Report the amount of interest paid on a new car loan on Form 1098-E
• Maintain records of all interest paid on new car loans

Consumers can also take steps to ensure that they are in compliance with this provision. These include:

• Ensuring that any new car loan made after January 1, 2026 is eligible for the exclusion from gross income
• Not reporting interest paid on a new car loan as income when filing tax returns
• Keeping records of all payments made on the loan

Conclusion

The No Tax on Car Loan Interest provision is an important part of the One, Big Taxcut Act. The guidance issued by the Treasury Department and the IRS provides clarity on how this provision applies in practice, and lenders should take steps to ensure compliance. Consumers can also benefit from this provision by excluding interest paid on new car loans from their gross income.

By working together, lenders and consumers can ensure that this provision is administered in a way that benefits everyone involved.

Frequently Asked Questions

Q: Who is eligible for the No Tax on Car Loan Interest provision? A: Only new car loans made after January 1, 2026 are eligible for the exclusion from gross income.

Q: How do I determine if my new car loan is eligible for this provision? A: Check the date of your loan. If it was made before January 1, 2026, interest paid on that loan is not excluded from gross income.

Q: Do I have to report interest paid on a new car loan on my tax return? A: No, interest paid on a new car loan is excluded from gross income and should not be reported as income when filing tax returns.

Q: What records do lenders need to keep in order to support the exclusion of interest from gross income? A: Lenders must maintain records of all interest paid on new car loans, as well as all other payments made on the loan.