The Internal Revenue Service (IRS) has released a proposed rule providing long-awaited clarification on how the new auto loan interest deduction established under H.R. 1 will be implemented. The guidance follows requests from credit unions and state leagues for greater clarity and aims to address key concerns related to new reporting requirements.
H.R. 1, the budget reconciliation bill passed earlier this year, created a temporary federal income tax deduction for interest paid on certain passenger vehicle loans for tax years 2025 through 2028. It also introduced new information-reporting obligations for lenders, raising concerns among credit unions about operational challenges and potential duplicate reporting.
In response to feedback from America’s Credit Unions and state leagues, the IRS proposal provides important clarifications, including designating which party must report deductible auto loan interest and reducing duplicative reporting in indirect and assigned-loan structures which are areas that have posed significant challenges for credit unions.
The proposed rule also incorporates several additional recommendations from the credit union system:
- Clear rules for assignees in indirect lending, outlining how to determine and report required information.
- Guidance on refinanced loans, limiting deductible interest to the outstanding principal balance at the time of refinance.
- Defined reporting procedures, including annual interest reporting and principal-balance snapshots.
- Allocation standards to distinguish qualifying vehicle-related amounts from non-qualifying balances, such as negative equity rolled into a loan.
Comments on the proposed rule are due February 2, with a public hearing scheduled for February 24. If you have any comments on the rule, please submit them to Advocacy@luminate.coop.