A tax change under the One Big Beautiful Bill Act (OBBB) could put some money, up to $10,000 per year, back into your pocket if you’re financing a new car. This marks a major shift from past tax rules, where interest on personal auto loans was completely nondeductible.

After the OBBB Act: Car Loan Interest Becomes Deductible

Starting January 1, 2025, and ending December 31, 2028, a new federal tax deduction is available to noncorporate taxpayers who take out loans for certain qualifying vehicles.

What’s the Deduction?

• You can deduct up to $10,000 per year in interest paid on a qualified passenger vehicle loan.
• This is an above-the-line deduction, meaning:
  • You don’t have to itemize to claim it.
  • It reduces your adjusted gross income (AGI) directly.

Who Qualifies?

• Available to individuals (not businesses such as Partnerships or Corporations).
• Begins to phase out when your modified adjusted gross income (MAGI) exceeds:
  • $100,000 (single filers)
  • $200,000 (joint filers)
• The deduction is reduced by $200 for every $1,000 over the MAGI threshold.
  

What Vehicles Qualify?

To claim this deduction, the vehicle must be:

• Brand new (first use begins with you)
• Final assembly must be in the United States
• Designed for public road use
• A car, SUV, pickup, van, minivan, or motorcycle
• Weigh less than 14,000 pounds

Electric vehicles (EVs) can qualify, as long as they meet the criteria.

What Vehicles Do Not Qualify?

Used vehicles, imported cars, vehicles with salvage titles, or cars bought for parts or scrap do not qualify.

What You Need to Report

To claim the deduction, you must report the Vehicle Identification Number (VIN) on your tax return.

Also, lenders who receive $600 or more in interest payments per year from borrowers must:

• File an information return with the IRS
• Provide a statement to the borrower with key details (loan amount, interest paid, VIN, etc.)

Failing to do so could result in IRS penalties for the lender.

Can I Deduct Interest on a Refinance?

Yes, but only up to the original loan amount, and only if the refinanced loan is also secured by the same qualifying vehicle with a first lien (for example, the lender has the primary legal claim to the car).

This Is a Limited-Time Offer (Literally)

This deduction only applies to loans taken out between January 1, 2025, and December 31, 2028. So if you’re planning to buy a new, U.S.-assembled vehicle in the next few years, now is the time to act.

Why This Matters

This new deduction is a win for taxpayers looking to finance a new, American-assembled vehicle. But like many tax benefits, it comes with limitations, and an deadline.

If you’re in the market for a new car, especially an electric vehicle, and you meet the income requirements, this deduction could save you thousands over the life of your loan.

Contact GFG to make sure your purchase and financing qualify.

Resources:

IRS One, Big, Beautiful Bill provisions