Car Loan Interest Deduction Under the OBBBA: What You Need to Know

Currently, personal interest expenses are generally not deductible. However, taxpayers who itemize deductions may deduct home mortgage interest, also known as qualified residence interest.

Under the One Big Beautiful Bill Act (OBBBA), car loan interest — now called “qualified passenger vehicle loan interest” — is also deductible.

Don’t be Confused by the “No Tax” in the Title

If car loan interest were deductible, it would be paid from after-tax income, rather than before federal income taxes. The deduction has sometimes been described as “no tax on car loan interest,” but this is not entirely accurate. A more precise explanation follows.

The OBBBA provides a temporary deduction for certain eligible individuals, including those who do not itemize, covering some or all of the interest on qualifying loans. These loans must be used to purchase a qualifying passenger vehicle.

From 2025 through 2028, up to $10,000 of car loan interest may be deducted annually if the loan was taken out after 2024 and is a first lien secured by the vehicle, which must be used for personal purposes. Leased vehicles are not eligible. However, not all buyers will be eligible for the deduction due to several limitations and restrictions, which are summarized below.

The Deduction Phase-Out Thresholds

This deduction is phased out starting at $100,000 of an individual’s modified adjusted gross income (MAGI) or $200,000 for married joint-filing couples. If your MAGI is above the applicable threshold, the amount that you can deduct (capped at $10,000) is reduced by $200 for each $1,000 of excess MAGI.

For unmarried individuals, the deduction is phased out when your MAGI reaches $150,000. For married joint filers, the deduction is phased out when MAGI reaches $250,000.

How to Qualify

To be eligible for the new deduction, the vehicle must be a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. The vehicle must be primarily manufactured for operation on public streets, roads, and highways, and it must be new, with original use commencing with the taxpayer.

Additionally, the vehicle’s final assembly must take place within the United States, and the vehicle identification number (VIN) must be reported on the tax return.

By law, “final assembly” is defined as:  

“Final assembly means the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”

Additionally, your car loan lender must report the amount of interest paid during the year on your qualified car loan to the IRS.

Loans: Original and Refinanced

Refinanced loans will qualify as long as: 1) the new loan is secured by a first lien on the eligible vehicle and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.

Interest on the following types of loans do not qualify for the new deduction:

• Loans to finance fleet sales

• Loans to buy a vehicle not used for personal purposes

• Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts

• Loans from certain related parties

• Any lease financing

Bottom Line

According to multiple sources, the majority of American car buyers utilize financing to complete their vehicle purchases. Consequently, the potential ability to deduct car loan interest is a benefit that would appeal to many taxpayers. However, this deduction is not available to higher-income taxpayers, buyers of used vehicles, or those purchasing foreign imports.

If you have recently purchased a new vehicle or refinanced an existing loan on a new vehicle, please inform your CPA or Tax Preparer. Notifying your tax professional is essential so they can guide you through the steps required to determine eligibility and, if applicable, claim the deduction.