This blog was last updated on January 9, 2026

The Treasury and IRS have begun implementing a new car loan interest deduction that allows many individual taxpayers to deduct interest paid on qualifying vehicle loans. While the policy has drawn headlines, the real work sits with auto finance lenders and financial services companies that must operationalize the rules, support borrowers, and meet new information reporting requirements.

This is not a “wait and see” moment. But it is also not a moment to start building bespoke systems for a regulation that is temporary and still evolving.

Car Loan Interest Deduction 2026: What Lenders Must do to Avoid Tech Debt

The deduction was created by the One Big Beautiful Bill Act of 2025, which added IRC section 163(h)(4). That new section carved out a limited exception to the long-standing rule that personal auto loan interest is not deductible.

To implement the statute, the IRS and Treasury issued:

• Notice 2025-57, providing transitional relief for the tax year 2025 and acknowledging that reporting infrastructure would not be immediately available.
• Proposed regulations (REG-113515-25), published in December 2025, defining qualified passenger vehicle loan interest and the scope of covered loans.
• A draft Form 1098-VLI, released for discussion purposes only.

Industry comments on the proposed regulations are due February 2, 2026. That matters because until the comment period closes and Treasury reviews feedback, the regulations cannot be finalized. As a result, the Form 1098-VLI cannot be finalized either.

Even in a smooth process with no major changes, a spring 2026 final form release is the earliest realistic outcome. That leaves lenders in a long interim period where data must be captured, but reporting rules are not final.

This timing reality makes one thing clear: building to a draft form is a mistake.

Eligibility Rules and What Qualifies as Interest

Under the proposed regulations:

• The deduction applies to new loans originated after December 31, 2024.
• Vehicles must be for personal use and have final assembly in the United States.
• The deduction is above the line and available to most individual taxpayers.

The regulations state that qualified passenger vehicle loan interest includes all interest payable with respect to the amount financed under a specified passenger vehicle loan. That language indicates that when a prior vehicle loan balance is rolled into a new qualifying loan and included in the amount financed, the amount of interest attributable to that rolled-over amount is included.

While future guidance may refine boundaries, lenders should assume this interest is in scope and ensure it is captured at the data level.

Lender Action Plan: How to Prepare for Car Loan Interest Deduction Reporting

Focus on Data Capture, Not Form Design

With the comment period still open on these Proposed Regulations and the final version of Form 1098-VLI months away from finalization, now is the worst possible time to hard-code reporting logic.

What lenders should be doing instead is ensuring they can reliably capture:

• Borrower name and TIN
• Loan origination date and qualification status
• Amount financed, including rolled-over balances
• Interest paid by calendar year

A more practical approach is to avoid locking reporting logic to a draft form altogether. With the regulations still open for comment and the form unlikely to be finalized until at least spring 2026, hard-coding 1098-VLI reporting workflows now creates unnecessary rework risk.

Instead, lenders should focus on ensuring that core systems can consistently capture and retain the underlying data elements required for reporting, while relying on an external reporting layer that can adapt as requirements evolve. Separating data capture from reporting execution reduces the likelihood that changes in form layout, instructions, or definitions force downstream system redesigns.

The form will evolve. The obligation to produce accurate, defensible data will not.

Consolidate Reporting Under Your IRW Strategy

Auto finance lenders are already subject to information reporting and withholding (IRW) rules. Many issue other information returns, such as Form 1099-INT or Form 1099-NEC, and any lender that files information returns is exposed to penalties under IRC sections 6721 and 6722 for incorrect or late reporting. The car loan interest deduction adds another reporting obligation to that existing footprint.

This is the moment to consolidate information reporting and withholding into a single outsourced solution, so that turning requirements on and off is configuration, not engineering. Without that separation, internal IT resources are inevitably pulled into designing and supporting a reporting build that will be retired when the deduction sunsets.

That risk is compounded by the fact that Form 1098-VLI must be transmitted through the IRS’s new IRIS platform via API, meaning this is not just a one-off form build but part of a broader technical shift in how information returns are filed. Even lenders that already issue other 1099s must now account for IRIS connectivity, authentication, schema management, and ongoing change, making a narrow, form-specific build particularly inefficient in the context of the wider IRIS transition.

Anticipate States to Follow Federal 1098-VLI Rules

Lenders should also expect state reporting considerations to follow federal implementation. Several states already require or accept Forms 1098 for mortgage interest and Forms 1098-E for student loan interest.

While no states have yet issued guidance specific to Form 1098-VLI, state conformity historically lags federal action. When it does arrive, it often expands reporting scope rather than narrows it. Planning solely for federal reporting increases the risk of having to revisit design decisions once state requirements emerge.

Name and TIN Accuracy Cannot Wait

Although incorrect name and TIN combinations remain the most common trigger for IRS information return penalties under IRC sections 6721 and 6722, IRS TIN Matching is not available for Form 1098-VLI, since the IRS only permits TIN Matching for payments subject to backup withholding.

That does not reduce the risk, but it does shift where the control must live.

For vehicle loan interest reporting, best practice is to collect a valid Form W-9 at onboarding and to ensure that the name and TIN used for tax reporting align precisely with the customer identity information already collected for AML and KYC purposes. This is not only a tax law requirement for W-9 information to be treated as valid, but also an operational consistency issue.

Lenders should have an operational process in place to:

• Collect a Form W-9 or valid Substitute version at time of originating the loan.
• Validate that the legal name and TIN submitted on Form W-9 exactly match internal customer records.
• Reconcile discrepancies between tax forms and AML/KYC documentation before reporting.
• Correct data upstream, rather than waiting for the IRS to notify of name/TIN mismatches after forms are filed.

Getting tax identity right at the front end reduces penalty exposure, limits post-filing remediation, and avoids unnecessary borrower outreach after forms are issued.

Prepare Borrowers Without Giving Tax Advice

Borrowers have never received a Form 1098-VLI before. Many will not recognize it, and lenders should expect questions unless expectations are set in advance. At the same time, lenders are not in the business of providing tax advice and should not be placed in that position.

The goal is not to explain how the deduction works. It is to reduce confusion and avoid unnecessary call volume.

Practical steps lenders should consider in 2026 include:

• Showing borrowers an example of what the 1098-VLI will look like, so the form itself is not a surprise when it arrives.
• Standing up a simple FAQ page that explains what the form is, why it is being provided, and where borrowers should go for tax questions.
• Promoting electronic delivery early, including advance communication that the form will be available electronically and encouraging borrowers to opt in. This helps reduce print and mail costs and avoids last-minute outreach tied to statutory mail delivery requirements.

Clear, proactive communication can prevent confusion without crossing into tax advice and can materially reduce downstream customer service impact during the first filing season.

Open Questions Reinforce the Case for Outsourcing

Some technical questions remain unresolved, and they are not academic. They go directly to how interest must be calculated, categorized, and reported on the new Form 1098-VLI.

Other IRS interest reporting regimes make clear that “interest” is not always limited to stated periodic interest. For example, in the student loan context, Treasury regulations under section 1.221-1(f) treat certain capitalized interest and related charges as interest for reporting purposes. Similarly, mortgage interest reporting under section 1.6050H-1 can include amounts beyond simple stated interest, depending on how charges are structured and assessed, including certain late charges and loan-related fees.

The proposed vehicle loan interest rules are still unclear, especially regarding late fees, deferred interest, and origination charges as reportable interest for Form 1098-VLI. Until Treasury issues final regulations, lenders should expect possible changes and avoid relying on interpretations that may not be permanent.

Lender Action Plan: Car Loan Interest Deduction Reporting

Again, The rules are not final. The form is not final. But the reporting obligation is clearly coming. Lenders need to act without hard-coding assumptions that may change.

That means focusing on durable data, clean tax identity, and a reporting approach that can adapt as guidance evolves and eventually sunsets. How this is handled now will determine whether 1098-VLI becomes a manageable compliance exercise or another cycle of unnecessary rework.

Learn more about the OBBA and its impact.