AFSA Engaged on Vehicle Finance Interest Tax Deduction
AFSA continues to work on issues relating to the implementation of the 2025 vehicle finance interest tax deduction. The deduction was part of the 2025 reconciliation package, and was designed to “deliver on presidential priorities to provide new middle-class tax relief.” The deduction for vehicle finance interest was written to provide a deduction from income tax for “any interest which is paid or accrued during the taxable year on indebtedness incurred by the taxpayer after December 31, 2024, for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle for personal use.”
Unfortunately, policymakers at the IRS have taken a narrow view of the scope of this deduction. In proposed regulations and in recently published Form 1040 Instructions, the IRS has taken the position that interest attributable to some elements of a vehicle finance transaction, such as negative equity or certain voluntary protection products, is not deductible by taxpayers.
AFSA and its members have pointed out to policymakers that in order to maximize the value of this tax relief and support the Administration’s priorities, the better course of action is to allow the deduction in the manner written in the statute: for any interest for the purchase of an eligible vehicle. The ability to finance negative equity and voluntary protection products is vitally important to consumers, and these elements of the vehicle finance transaction should not be disfavored in connection with the new tax deduction.
AFSA will continue to engage with the IRS, Treasury, the Small Business Administration, Congress, and others in order to broaden the applicability of the tax deduction.
February 19th, 2026