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.

Government Forces Sale to Cover Partner’s Tax Debt

 I was reading a case recently that bothered me. It involves something that – fortunately – I rarely see in practice.

Here is the Code section:

§ 7403 - Action to enforce lien or to subject property to payment of tax

(a) Filing. In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability. For purposes of the preceding sentence, any acceleration of payment under section 6166(g) shall be treated as a neglect to pay tax.

(b) Parties. All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.

(c) Adjudication and decree. The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States. If the property is sold to satisfy a first lien held by the United States, the United States may bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs.

(d) Receivership. In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.

And here is where you leave your tax CPA and hire a tax attorney.

Section 7403 permits a court to authorize the sale of property when a delinquent person owns property with a nondelinquent person. The IRS cannot do this on its own power, however; it must first go to district court and obtain approval.

To be fair, one is deep into the IRS Collection machinery before Section 7403 is even an issue. I would be screaming at you – and likely fired you as a client – long before we got here, unless bad fortune was involved. If there was bad fortune, we likely would be submitting an offer in compromise.

The heavyweight case in this area is United States v Rodgers. Rodgers was a Texas gambler who died, leaving a $900,000 tax debt. He (well, now his estate) and his wife owned their home. Under Texas law the surviving spouse had a lifetime right to live in the home. The government of course wanted its money.

The case went all the way to the Supreme Court, which identified four issues before the government could force any sale to collect taxes.

 (1) Statutory authority

Does the taxpayer have any “right, title or interest” to the property in question?

 

In Rodgers, yes. The deceased had the same rights to the entire home as did the widow.

 

The type of ownership can have a drastic effect on the government’s ability to reach the asset. A tenancy by the entirety, for example, might result in a different answer from a tenancy in common (which we will see below). 

            (2) Constitutional authority

This goes back to eminent domain. The government is not an ordinary creditor in this situation; rather it is exercising the prerogatives of a sovereign. Think of the government as a super creditor.

            (3) Practical undercompensation

Think actuarial calculations. For example, one could think that a 50/50 split of marital assets is fair. However, the value of a life estate to a surviving spouse aged fifty can be up to 95% of the home’s sales price. The spread between 95% and 50% is referred to as “practical undercompensation.”

            (4) Four-factor balancing test

             (a)  Will a non-sale prejudice the government?

   (b) Does the spouse have a legally recognized expectation of the house not being sold?

   (c)  Will the spouse suffer prejudice from practical undercompensation and dislocation costs?

   (d)  What are the relative characters and values of the two ownership interests?

Subsequent application of Rodgers focuses on these four factors.

Let’s move on to Driscoll.

Thomas Driscoll was a dentist. He owned a dental practice with Dr Vockroth. Together they also owned the building in which the dental practice was located.

Common enough.

Dr Driscoll became substantially delinquent with his tax obligations.

In April 2023, the government filed a motion for forced sale of both the practice and the building.

Meanwhile. Dr V had no tax issues. He may have made the mistake of partnering with someone who did, but that was the extent of his culpability.

The government – to its credit – allowed additional time to sell both assets.

But there were issues: trying to sell a dental practice in a small town and a building housing said practice in said small town. Let’s just say there was limited interest in buying either.

The government now wanted a forced sale.

Let’s go through the Rodgers four factors:

One

The Court decided Dr V could not show that the government would not be prejudiced by going after 50% rather than 100% of the practice and building.

Yes, the double negative is a bit difficult to follow.

This was a practice in a small town. It was going to be tough enough to sell without trying to sell half rather than the whole.

         The court decided that factor one weighed in favor of a sale.

         Two

Was Dr V as a tenant in common subject to a forced sale?

Here is the Court discussing the real estate:

This conclusion is also supported by the fact that, unlike tenants by the entirety or joint tenants, tenants in common enjoy no protections from forced sales or partition actions.”

Tough to be a tenant in common in New Jersey.

The court decided factor two weighed in favor of a sale.

Three

 Was there prejudice to Dr V in terms of personal dislocation of costs and undercompensation of interest?

Here is the Court:

 Dr Vockroth asserts that he will be ‘forced to lay off all of [his] employees,’ and that he will ‘no longer be able to see [his]  patients.'”

OK, Dr V may be laying it on thick, but that does not mean there is no truth here. Relocating a practice costs money. There are – for example - additional electrical and plumbing needs before a building can house a dental practice. Patients may not follow. Employees may not follow. The court is playing cavalierly with other people’s lives.

Here is the court in its best Frasier Crane voice:

 Furthermore, even if Dr Vockroth is negatively affected by the LLC in some way, this is not an undue prejudice of a magnitude to prevent a forced sale. It is axiomatic that LLCs and partnerships change, fail, dissolve and are bought and sold with regularity. Partners die or sell their shares The reality is simply part of being in business, and Dr. Vockroth is not exempt from this fact, especially when he fails to offer any reliable evidence to support his contentions.”

What is Dr V to do: poll his patients and employees to see whether they would follow? Oh, that will go swimmingly.

BTW the sale of a dental practice will certainly include a noncompete, meaning that Dr V could not open a dental practice within so many miles of the existing practice. Well, he could, but he would be sued.

One would think a judge would know that.

Four

  The relative character and value of the property owned by the two owners.

There was not much play here as both doctors owned 50%.

The court decided that the government could foreclose on both the practice and the real estate.

Technically right, but lousy law. Consider this menacement from Rodgers:

We do emphasize, however, that the limited discretion accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes.

Section 7403 is not taxpayer friendly.

Our case this time was United States v Driscoll, 2025 BL 2655, D.N.J. No. 3:18-cv-11762, 1/6/25.