Most car buyers in the U.S. rely on financing, and many are asking the same question: “Is car loan interest tax-deductible under the new law?” The answer is sometimes—but not for everyone.
The One Big Beautiful Bill Act (OBBBA) creates a brand-new deduction for certain auto loans starting in 2025. While some reports suggest there’s “no tax on car loan interest,” that’s misleading. Here’s a clear breakdown of how the rule works, who qualifies, and the limitations you need to know.
How the New Deduction Works
Under prior federal rules, personal interest (like car loans) couldn’t be deducted, with the exception of home mortgage interest. Now, OBBBA introduces qualified passenger vehicle loan interest as a new deductible category.
For tax years 2025 through 2028, eligible taxpayers may deduct up to $10,000 in car loan interest annually. The loan must be:
- A first lien secured by the vehicle,
- Taken out after January 1, 2025,
- Used to purchase a new vehicle for personal use (not business or fleet).
Leases and used cars don’t qualify.
Income Limits and Phaseouts
The deduction is limited for higher earners. It begins to phase out once your modified adjusted gross income (MAGI) exceeds:
- $100,000 for single filers
- $200,000 for married couples filing jointly
For every $1,000 over the threshold, the deduction drops by $200.
- At $150,000 MAGI (single) or $250,000 MAGI (joint), the deduction disappears completely.
Vehicle Requirements
Not every car will qualify. Eligible vehicles must meet all of the following:
- A new car, SUV, van, pickup truck, minivan, or motorcycle
- Gross vehicle weight under 14,000 pounds
- Final assembly completed in the U.S. (verified through the VIN)
- VIN reported on your tax return
Other Key Rules
- Refinancing: A refinanced loan remains eligible if it’s secured by the same car and the balance doesn’t exceed the original loan.
- IRS Reporting: Your lender must file an information return confirming the amount of interest you paid.
Loans That Don’t Qualify
- Fleet vehicle loans
- Non-personal use vehicles
- Salvage or scrap-intended vehicles
- Loans from certain related parties
- Lease financing
The Takeaway
The OBBBA makes car loan interest temporarily deductible, but only under specific conditions. High-income buyers, used car purchases, and foreign-assembled vehicles are excluded.
For many taxpayers, this could be a valuable break starting in 2025—but only if you meet the requirements.
Tip: Before financing a new vehicle, check whether it qualifies for this deduction and how your income level affects your eligibility. Contact a tax professional for personalized advice.
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Learn how the 2025 tax law change affects car loan interest deductions. Find out who qualifies, income limits, eligible vehicles, and how to claim the deduction under the OBBBA.