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.

Will I Qualify For The Tips Deduction?

 

Can I take advantage of the new tips deduction?

I will be slowing down in 2026: fewer hours, fewer clients, unlikely to accept new clients. It was inevitable, but the events of the last year-plus have accelerated my decision. I was witness to friends and the consequences from their sale of a firm. I do not care to see that again.

Can I do anything in 2026 to catch a tax break?

We are talking about the “No Tax On Tips” provision of the One Big Beautiful Bill signed by the President on July 4, 2025. The break will last four years – beginning in 2025 – and allow a tipped worker to exclude up to $25,000 of “qualified” tips from income taxes.

COMMENT” Yes, the break is retroactive to January 1, 2025 even though the OBBB was not signed until July 4.

COMMENT: The $25 grand is per return. If you file single, the limit is $25 grand. If you file jointly, the limit is again $25 grand. Another important point is that we are talking about federal income taxes only. Those tips are still going to be subject to social security taxes, just like before.

There is an income limit, of course: $150 grand for singles and $300 grand for marrieds.

The break is available whether you are a tipped employee or tipped self-employed. The reporting to you, however, will be different.

If you are an employee, you will receive a 2025 Form W-2 from your employer.

I want you to notice Box 7: Social Security Tips.

The tips deduction uses the term “qualified” tips.

Mind you, it is possible that Box 7 is also the amount for qualified tips, but it does not have to be. The tax Code does this sleight-of-hand repetitively by sliding the word “qualified” before otherwise innocuous nouns. How can a tip be “nonqualified?” Easy: it is nonvoluntary. How does that happen? Again - easy. Say that you have a party of eight or more and the restaurant applies an automatic gratuity of 18%. That fact that the gratuity/tip is now automatically included means that it is nonvoluntary, which means it is not “qualified,” which means it does not qualify for the tips deduction.

So ... how is one to know how much of box 7 is qualified?

Fortunately – and given that the law was passed halfway into the year – the IRS realized that employers and payroll companies could not make these changes retroactively. In Notice 2025-62, the IRS stated that - for 2025 only - an employee can assume that Box 7 is the same amount as qualified tips. Employers can also get this information to employees via other means, such as an online portal.

A new W-2 will be in place for 2026.

What about tipped self-employeds?

Now we are circling back to my situation and the tips deduction.

Scratch that Form W-2, as I will not be an employee. I may get some flavor of Form 1099, though.

Form 1099-K         used for credit and debit cards

Form 1099-NEC    used for independent contractor

Form 1099-MISC  used for other reportable payments

I took a look: nope, not seeing any 2025 reporting for tips. I see something on Form 1099-MISC Box 10 for payments to an attorney, but I am not an attorney. The IRS has said, however, that they are revising the 2026 forms to include tips information. That's OK, I will adjust my 2026 invoices as necessary - if I can otherwise qualify for the deduction.

I gotta ask: how will the IRS know if I am self-employed and have 2025 income representing qualified tips?

I see the following IRS guidance: “you can rely on your own tip records.”

Not the hardest tax planning I have seen.

The IRS buttressed this with proposed Regulations on September 22, 2025.

I see four requirements in the Regulations for a qualified tip:

·      Is paid voluntarily

·      Is not received in a specified trade or business

·      Satisfies other requirements established by the Secretary

·      Received in an occupation that customarily and regularly received tips on or before December 31, 2024

Let’s see:

·      I can meet this: you can pay me voluntarily or involuntarily, but you will pay me.

·      This is a problem. I am not going to labor you with the provenance and metaphysics of “specified trades or businesses,” other than to say that common examples include physicians, attorneys, and accountants.

o   But there is transitional relief until January 1 “of the first calendar year following the issuance of final regulations ….”

§  I may still be in the running.

·      I will worry about other requirements when they happen.

·      We hit a hard stop with “customarily and regularly received tips.”

o   The IRS published a list of qualifying occupations.

o   I see the expected: bartenders, wait staff, hair stylists, and so forth.

o   I see a few unexpected: home landscapers, electricians, and plumbers.

o   I see nothing for accountants and tax preparers.

o   I do see something for “#209 Digital Content Creators.”

§  I suppose I could put these blogs on YouTube and be a “content creator.”

I am not seeing a (reasonable) way to meet that fourth requirement and get my 2026 fees to qualify for the tips deduction, unfortunately. I suppose an occasional client might mark my fee as a “tip” – thereby hoping to help me out – but I am not seeing a way to sidestep (at least legitimately) the “customarily and regularly” hurdle.

I won’t, but you know somebody will.

The tax literature is littered with cases like these.

Income And Cancellation of Indebtedness

 

I am reading a case about cancellation of indebtedness income. 

Let’s take a moment to discuss the concept of income in the tax Code. 

The 16^th amendment, passed in 1913 and authorizing a federal income tax, reads as follows: 

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Needless to say, the definition of “incomes, from whatever source” became immediately contentious. 

Ask a tax practitioner for a definition of income, and it is likely that he/she will respond with “an accession to wealth.” 

That phrase comes from a 1955 Supreme Court case (Commissioner v Glenshaw Glass) which included the following: 

Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." 

I am seeing three conditions, of which “accession to wealth” is but one. 

Let’s circle back to indebtedness and income.

Can one have income by borrowing money? 

Unless there is something extraordinarily odd about the loan, I would say “no.” The reason is that any increase in wealth (by receipt of the loan proceeds) is immediately offset by the requirement to repay the loan. 

Let’s say you buy a house. You take out a mortgage. 

What if you are in financial distress and mail the keys back to the mortgage company? 

Granted, the house secures the debt, but surrendering the house does not automatically release the debt. It however will likely result in your receiving the following 1099:

Like any 1099, there is a presumption of income. In this instance, there has been an exchange in the ownership of the house. There is another way to say this: the tax Code sees a sale of the property. 

It seems odd that tax sees potential income here. It is unlikely to happen if the surrendered asset is one’s principal residence, as one would have access to the $250,000/$500,000 gain exclusion. It could happen if the surrendered asset is rental or investment property, though. 

What about the debt on the property? 

Tax considers that a separate transaction. 

When the debt is discharged, the IRS has yet another form: 

Yes, it gets confusing. The system works much better when the two steps happen concurrently – such as in a short sale. In that case, it is common to skip the 1099-A altogether and just issue the 1099-C. 

NOTE: There is a twist in the straw depending upon whether the debt is recourse or nonrecourse. Believe it or not, there are about a dozen states where you can buy your principal residence with nonrecourse debt. You will not be surprised to learn that California is one of them. The upside is that you can return the keys to the bank and no longer be responsible for the mortgage. The downside is this policy was a major contributor to the burst of the housing bubble in the late aughts.

It is common for the 1099-C to be issued three years after the 1099-A. Why? The Code requires the reporting of cancellation of indebtedness on or before an “identifiable event” happens. 

An identifiable event in turn is defined as: 

1.  bankruptcy
2.  expiration of statute of limitations for collection
3.  cancellation of debt that renders it unenforceable in a receivership, foreclosure, or similar proceeding
4.  creditor's election of foreclosure remedies that statutorily bars recovery
5.  cancelation of debt due to probate proceedings
6.  creditor's discharge pursuant to an agreement
7.  discharge of indebtedness pursuant to a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt
8.  in specific cases, the expiration of a non-payment testing period [presumption of 36 months of no payment to the creditor]    

The three years is number (8). 

The income type we are discussing with the 1099-C is cancellation of indebtedness income. As discussed, just borrowing money does not create income. Whereas your assets may go up (you have cash from the loan or bought something with the cash), that amount is offset by the loan itself. The scales are balanced, and there is no accession to income. 

However, cancel the debt. 

The scale is no longer balanced. 

Meaning you have potential income. 

But the Code allows for exceptions. Here is Section 108: 

                (a) Exclusion from gross income

(1) In general Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

(A) the discharge occurs in a title 11 case,

(B) the discharge occurs when the taxpayer is insolvent,

(C) the indebtedness discharged is qualified farm indebtedness,

(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or

(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—

(i) before January 1, 2026, or

(ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2026. 

The common ones are (a)(1)(A) for bankruptcy and (a)(1)B) for insolvency. 

Bankruptcy is self-explanatory. 

Solvency is not self-explanatory. You can think of insolvency as being bankrupt but not filing for formal bankruptcy. You owe more than you own. Let’s call the difference between the two the “hole.” To the extent that that cancelled debt is less than the “hole,” there is no cancellation of indebtedness income. Once the cancelled debt equals the “hole,” the exclusion ends. At that point, your net worth is zero (-0-). Technically the next dollar is an “accession to wealth” and therefore income. 

In our case this week Ilana Jivago borrowed from Citibank. She defaulted and was eventually foreclosed on in 2009. Citibank sent her a 1099-C. Jivago argued that it was nontaxable because it was qualified principal residence indebtedness per (a)(1)(E) above. 

Qualified principal residence indebtedness is defined as:         

Indebtedness incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer.

The Court looked at photographs of and admired the renovations she made in 2005 and 2006. The Court noted that Jivago did not use an interior designer, and she did much of the work herself.

The problem is that 2005 and 2006 were before she borrowed from Citibank. 

Easy win for the IRS.

Our case this time was Jivago v Commissioner, Docket No. 5411-21.