There is a new tax deduction regarding car loan interest that was included in the recently signed legislation, the One Big Beautiful Bill (OBBB). The OBBB Act creates a deduction of up to $10,000 for qualified passenger vehicle loan interest for the tax years 2025- 2028.
Within OBBB, there are four pieces of new legislation that reflect initiatives President Trump supported during his presidential campaign: a Car Loan Interest Credit, No Tax on Tips, No Tax on Overtime, and a Senior Tax Deduction. Each of these are currently set as temporary and will apply to tax years 2025 (right now!) to 2028.
How the Car Loan Interest Deduction Will Work
The amount of the deduction is up to $10,000 for each taxable year – starting now in 2025 – and ending in 2028. This means you can reduce your taxable income by up to $10,000 as long as you paid that much in car loan interest on a qualified vehicle in applicable tax years.
It is an “above the line” deduction, which simply means that you do not need to itemize on your return – anyone who is eligible can take the deduction. The amount of interest you have accumulated will have to be reported in some way. There is speculation that the IRS will have to develop a new Form 1098 for this purpose and that car dealerships will be required provide this to taxpayer, but this has yet to be clarified by the IRS. Right now, the legislation requires that the vehicle identification number will have to be provided on the tax return.
The deduction has a phase-out for those earning higher wages. The deduction is reduced by $200 for each $1,000 of a taxpayer’s modified adjusted gross income (MAGI) of $100,000 for single filers and $200,000 for married filers. For instance, a single filer with a MAGI of $160,000 has $60,000 over the limit. They must reduce their deduction by $100 for each $1,000 over the limit which means they can deduct $9,400 from Federal taxes ($10,000 deduction minus $600).
What Vehicles Qualify for the Car Loan Interest Deduction
The deduction applies to any interest that 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. Here is a more simplified breakdown:
The vehicle should have at least 2 wheels and can be a car, minivan, van, sports utility vehicle, pickup truck, or motorcycle and it should be manufactured primarily for use on public streets, roads, and highways. It must weigh less than 14,000 pounds. Based on this definition, it appears golf carts and RV-style vehicles will not qualify.
The vehicle needs to be for personal-use – no fleet sales or commercial vehicles will qualify.
The vehicle must be purchased, not leased.
This deduction is only available on the first sale of the vehicle.
In order to qualify for the credit, the final assembly of the vehicle must have occurred in the United States.
Questions
This is a new deduction that unlike tips and overtime, are not tracked through a payroll process, so we do not know yet how the IRS will have information submitted. Avizo will share information as we learn, so if you’ve already made a qualified purchase, or want to do so before the end of the year, please stay in touch so we can share any action items before filing seasons begins.
Chris VanArsdale
Chris is a Manager in our tax department with over 10 years of experience. His specialties include international, trust and estate, and business tax filings.
