New Vehicle Loan Interest Deduction

 

I have been looking at individual tax changes for 2025 returns as well as changes starting anew in 2026. We may do several posts covering the changes likely to affect the most people.

I will start with one that may affect me: the new vehicle loan interest deduction.

My car has been reliable, but it is getting old. There comes a point with older cars where regular maintenance instead changes to regular repairs. I may or may not be there yet, but I am paying attention. What I know is the next car will not be cheap.

So, what is the tax change?

First, it is a deduction, not a credit. As we have discussed before, a credit is worth more than a deduction (a credit is dollar-for-dollar, whereas a deduction is a dollar-times-the-tax-rate). We will take it, though.

Second, it is not an itemized deduction. This is important, because introducing something as an itemized deduction is as much political sleight-of-hand as a real tax break. How? Easy. Let’s say that you are married, and the sum of your taxes, mortgage interest, and contributions is $25 grand. The tax Code spots you $31,500 just for being married (this amount is called the standard deduction). Which number will you use: the actual ($25,000) or the standard ($31,500)? The standard, of course, because it is the bigger deduction. Now someone can yammer that your mortgage interest is deductible – but is it really? I would argue that it is not, because the $31,500 is available whether you have a mortgage or not. Calling it deductible does allow for political blather, though.

The vehicle loan interest deduction is taken in addition to the itemized/standard deduction. It will show up on line 13b (see below), after the standard deduction/itemized deductions on line 12e. Our married couple will be deducting $31,500 (the standard) plus the allowable new vehicle loan interest.

Third, the deduction is not limited to cars. Technically it applies to “qualified passenger vehicles,” a term that includes the usual suspects (cars, trucks, SUVs, vans, minivans) as well as motorcycles. I am not as clear on campers, although the 14,000-pound limitation might kick-in there.

Fourth, it must be a new vehicle, which the Code refers to as “original use.” Not surprisingly, there is a special rule to exclude dealership demo use.

Fifth, you must have bought the vehicle after 2024. The deduction expires (unless a future Congress extends it) after 2028. Note that I said “bought.” A lease will not work.

Sixth, the deduction is for personal use of the vehicle, and the personal use must exceed 50 percent. While this may sound strict, it is not. Deductions for business use of a vehicle might take place under other areas of the tax Code, so it is possible that you will be deducting some of the interest as a business deduction (say as a proprietor or landlord) and the personal portion under this new deduction. You decide how to chop-up and report the numbers (some business, none business), and you cannot deduct the same interest twice. The behind-the-scenes accounting might be a mess, but you have the concept. There is also a favorable rule concerning personal use: such use is decided when you buy the vehicle. Later changes in use will be disregarded.

Seventh, the deduction is available to individuals, decedent estates, (certain) disregarded entities and nongrantor trusts. An estate is not immediately intuitive (why would a deceased person buy a vehicle?), but it refers to someone passing away after buying a vehicle qualifying for the deduction. A nongrantor trust generally means a trust that files its own tax return. Personal use would be measured by the beneficiary, as a trust cannot drive a car.

Eighth, there are some housecleaning rules. For example, you cannot pay interest to yourself or – more accurately stated – to a related party. The Code wants to see a lien securing the loan on the vehicle. There are also rules on add-ons (think extended warranties), lemon law replacements, subsequent loan refinancings, and no-no rules on negative equity on trade-ins.

Ninth, final assembly must occur in the United States. You may want to check on this before buying the vehicle. I have already checked on my next likely vehicle purchase (a Lexus).

Tenth, the deduction limit is $10 grand. It doesn’t matter if you are married or single, the limit applies per return and is $10 grand. Seems to me that marrieds filing separately got a break here. File jointly and cap at $10 grand. File separately and cap at $20 grand. Such moments are rare in the tax Code.

Eleventh, if you make too much money, the Code will phase-out the deduction you could otherwise claim. Too much begins at $100 grand if you are single or $200 grand if you are married filing jointly. Hit that limit and you phase-out at 20 cents on the dollar (rounded up).

Twelfth, you must include the vehicle VIN on your tax return. Leave it out and the IRS will simply disallow the deduction and send you a bill for the additional tax.

Finally, Congress and the IRS prefer that anything which moves be reported on a Form 1099. The problem here is that the tax bill was signed midway into 2025, meaning that banks and loan companies would have to make retroactive changes for 1099s issued in 2026. In light of this, the 2026 reporting (for tax year 2025) has been relaxed a bit: you may have to go to a website to get the interest amount rather than receiving a formal 1099, for example. Do not worry, though: the normal 1099 reporting will be back in full force in 2027 (for the 2026 tax returns).

My thoughts? I would neither buy or not buy a vehicle because of this deduction, but I am happy to take the deduction if I bought and financed. The $10 grand limit seems high to me, but - to be fair - I avoid borrowing money. I suppose $10 grand might be a backdoor way to allow for two vehicle loans on the same tax return (think married filing jointly). I do know that - unless one is making beaucoup bucks - spending $10 grand on vehicle interest does not immediately appear to be sound household budgeting.

And there you have the new vehicle loan interest deduction.

New Rules for 2026 Charitable Contributions

 

I have been going through the provisions of the new tax bill (One Big Beautiful Bill Act), which I refer to as OB3 (Oh Bee Three). I like the Star Wars reverb to it.

You ever wonder how the tax Code gets so complicated?

I can understand if one is already in a complex area to begin with. Take an international conglomerate, sprinkle in some treaty relief, add transfer pricing creativity and bake off for FDDEI minutes and it makes sense.

But what about something routine – something like charitable contributions?

Let’s talk about OB3 and contributions.

We will separate our discussion into two sections: contributions for C corporations and contributions for individuals.

C Corporations

For years, the rule for C corporation contributions has been simple: there is a limit of 10% of taxable income before any charitable deduction.

EXAMPLE ONE:

Blue Sky Corp has taxable income of $1 million before a charitable deduction of $105,000. Blue Sky can deduct $100,000 ($1 million times 10%). The $5,000 balance carries forward to the next tax year.

Let’s call that 10% the ceiling. It has been tax law since I came out of school.

OB3 has introduced a floor. The new law is that C corporation contributions are allowed only to the extent they exceed 1% of taxable income before any charitable deduction.

EXAMPLE TWO:

Let’s return to Blue Sky, which made charitable contributions of $9,000. Well, 1% of $1 million is $10 grand. $9 grand is less than $10 grand, so Blue Sky gets no deduction at all.

But wait, it gets better.

There is a macabre dance between the ceiling and the floor.

·       Contributions in excess of the 10% ceiling may be carried forward.

·       Contributions cut off at the knees by the 1% floor may be carried forward, BUT ONLY IF the corporation’s contributions exceed the ceiling.

What are they talking about?

The ceiling (sub) rule has been with us for decades. In Example One, the $5,000 may be carried forward up to five years.

The floor (sub) rule is … peculiar.

Let’s go back to Example Two. Blue Sky did not clear the floor and did not exceed the ceiling. Blue Sky loses that $9 grand as a deduction forever. Blue Sky is grey.

Let’s tweak Example Two and call it EXAMPLE THREE:

Blue Sky makes contributions of $125,000.

Blue Sky loses the first 1%, which is $10 grand ($1 million times 1%).

At this point we still have $115,000 at play.

To be cut off at $100 grand, leaving $15,000.

However, since Blue Sky exceeded BOTH the ceiling (by $15 grand) and the floor, it gets to carryforward both the $15 grand (ceiling) and the $10 grand (floor) for a total carryforward of $25 grand.

Another way to say this is: if you clear both the floor and the ceiling, you are back to the old rule ($125,000 minus $100,000).

But look at the hoops you must go through to get back to where you were.

Congress has malintent, methinks.

Individuals

We also have a shiny new contribution floor for individuals. The floor is ½ of 1%, so it is less than a corporation.

The new rule for Individual contributions works solely off the floor, so we avoid the double Dutch dilemma of Example Three.  

On to EXAMPLE FOUR:

Bo Runs-Like-A-Gazelle plays in the NFL and makes $7 million.

Bo’s charitable floor is $7 million times .005 = $35 grand.

Bo makes contributions of $33,000 grand.

Bo did not clear the floor, so Bo gets no charitable deduction.

However, does Bo at least get to carryforward the $33 grand?

No, Bo does not.

Bo is hosed.

Let’s tweak for EXAMPLE FIVE:

Same as Example Four but Bo donates $50 grand.

His floor is still $35 grand.

Bo has a deduction of $15 grand.

However since Bo cleared the floor, he gets to carry over the $35 grand (the floor) to future tax years.

Bo is less hosed.

There is another grenade from OB3 that might also affect Bo: if his tax rate ever exceeds 35%, the tax benefit from a charitable contribution will stop at 35%. We will leave that tax twister for another day.

There is a positive provision in OB3 for nonitemizers: beginning in 2026 one will be able to deduct $1,000 (if single) or $2,000 (if married) for cash contributions. Yep, you will be able to claim the standard deduction and another grand (or two), assuming you made contributions. It's something.  

Congress continues to add complexity to the Code, and not just for heavy hitters like Bo. Unfortunately, these rules might (in fact, they probably will) affect you and me – average folk. So why did Congress do it?  Same reason junkies steal: Congress is addicted. There is no other reason for nonsense like this.

How will tax advisors react? We will educate clients on ceilings and floors, and we will continue to emphasize “bunching.” Bunching means that you make an oversized donation in one year and a much smaller (or no) donation the following year. It can be rough on the receiving charity (can you imagine budgeting), but what are you (as a donor) to do?

Family First Coronavirus Response Act

Congress passed and the President signed a coronavirus-related bill this week. While mainly addressing employment benefits, it also includes payroll-tax-related provisions to mitigate the effect of the benefit expansion on employers.

Following is a recap of the Act. It is intended as an introduction and quick reference only. Please review the Act itself for detailed questions.

The Family First Corona Virus Response Act has two key employment-benefit components. Employers are to be reimbursed for the benefit expansion via a tax credit mechanism.

A. The Emergency Paid Sick Leave Act

1.  Private employers employing less than 500 employees shall provide an employee with paid sick time if:

i. The employee is subject to quarantine or isolation due to COVID-19.

ii.  The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID– 19.

iii.  The employee is experiencing symptoms of COVID– 19 and seeking a medical diagnosis.

iv. The employee is caring for an individual described in (i) or has been advised as described in (ii).

v. The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions.

vi. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

2. Full-time employees are entitled to 80 hours of paid sick time.

3. Part-time employees are entitled to the average number of hours worked on over a 2-week period.  For employees with varying schedules, the employer shall use the employee’s average number of hours per day over the 6-month period ending on the date the employee takes leave under the Act.

4. If an employee takes time off for self-care, the employee shall be compensated at the employee’s regular pay rate.

     i. Not to exceed $511 per day and $5,110 in the aggregate

5. If an employee takes time off for a sick family member or child, the employee shall be compensated at 2/3 of the employee’s regular pay rate.

     i. Not to exceed $200 per day and $2,000 in the aggregate

6. There are comparable provisions for the self-employed.

7. The Act expires on December 31, 2020.

8. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

9. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

B. Emergency Family and Medical Leave Expansion Act (E-FMLA)

1. The Act expands coverage of the Family and Medical Leave Act (“FMLA”) for employers with fewer than 500 employees. Employees are typically not eligible for FMLA leave until they have worked at least 12 months and 1250 hours. 

i.  For purposes of E-FMLA, this threshold is reduced to 30 days.

2.  E-FMLA applies if the employee leave is to care for a child under 18 if the school or place of care has been closed or child care provider is unavailable due to a public health emergency.

3. Protected leave can be for up to 12 weeks, but the first 10 days may consist of unpaid leave.

4.  The employee shall be compensated not less than two-thirds of the employee’s regular rate of pay.

i. Not to exceed $200 per day and $10,000 in the aggregate (for each employee)  

5. There are comparable provisions for the self-employed.

6. The Act expires on December 31, 2020.

7. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

8. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

C. Tax Credits

1. The compensation paid under the Act is not subject to the Old-Age, Survivors and Disability portion of FICA (that is, the 6.2%).

2. The compensation paid under the Act is subject to the Hospital Insurance portion of FICA (that is, the 1.45%).

3. On a quarterly basis, employers can claim a payroll tax credit for the sum of the following:

                a. Wages paid under this Act

b. Allocable “qualified health plan expenses” 

      ... think health insurance

c. The employer portion of Hospital Insurance (that is, the 1.45%)

4. Treasury is authorized to issue Regulations waiving penalties for not making payroll tax deposits in anticipation of the credit to be allowed.

5. The credit is refundable if it exceeds the amount the employer owes in payroll tax.

6. Employer taxable income is to be increased by the amount of payroll credit received.

           i. Otherwise there would be a double tax benefit.