Federal Auto Loan Interest Deduction Begins in 2025 Under OBBBA
Kort Redick, CPA
Beginning in 2025, a significant change to the federal tax code will temporarily allow individuals to deduct interest paid on loans for the purchase of qualifying personal-use vehicles. This new benefit stems from Section 70203 of the One Big Beautiful Bill Act (H.R. 1, or OBBBA), which amends Internal Revenue Code §163(h) to permit a limited deduction that was previously disallowed for personal car loan interest.
For tax years 2025 through 2028, taxpayers may deduct up to $10,000 annually in interest paid on qualifying auto loans. Unlike many deductions, this one is available to taxpayers regardless of whether they itemize, making it an above-the-line deduction. Specifically, the law excludes "qualified passenger vehicle loan interest" from the definition of nondeductible “personal interest” under IRC §163(h), allowing it instead to be deducted under §163(a).
To qualify, the vehicle must be used for personal—not business—purposes, and meet strict criteria:
The vehicle must be new and used first by the taxpayer.
It must be assembled in the United States.
It must weigh under 14,000 pounds gross vehicle weight.
It must be a car, minivan, van, SUV, pickup truck, or motorcycle.
In addition, the loan must be secured by a first lien on the vehicle and originated after December 31, 2024. Loans used to refinance an eligible loan are also covered, but only up to the original principal amount.
The deduction phases out for higher-income taxpayers. Specifically, for each $1,000 (or fraction thereof) by which a taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint filers), the deductible amount is reduced by $200. This means a taxpayer with $105,000 in MAGI, for example, would see their eligible deduction reduced by $1,000. MAGI for this purpose includes foreign earned income exclusions and certain U.S. territory exclusions.
To claim the deduction, taxpayers must include the vehicle identification number (VIN) on their federal income tax return. The IRS will require lenders to file information returns similar to Form 1098 reporting the amount of interest paid, vehicle details, and origination information.
Several categories of financing and vehicle types are excluded from the deduction:
Loans for fleet or commercial vehicles not used for personal purposes
Lease financing arrangements
Vehicles with a salvage title or intended for scrap/parts
Loans from related parties (as defined under IRC §§267(b) and 707(b)(1))
Importantly, this new deduction applies only to vehicles purchased for personal use. Interest on loans for vehicles used in a trade or business remains deductible under the existing rules in IRC §163(a), subject to the business interest limitation under §163(j). Taxpayers with vehicles used for both business and personal purposes must allocate interest accordingly.
This deduction is temporary. Under the statute, it applies only to taxable years beginning after December 31, 2024, and before January 1, 2029. Barring future legislative changes, personal-use auto loan interest will again become nondeductible starting in 2029.
The OBBBA’s new vehicle loan interest deduction offers meaningful savings for qualifying taxpayers purchasing new, U.S.-assembled personal vehicles beginning in 2025. With a $10,000 annual cap, income-based phaseouts, and detailed eligibility and reporting requirements, the provision provides a unique though temporary opportunity to reduce federal taxable income on a common household expense. Business-use vehicle interest deductions remain unchanged. Taxpayers planning a vehicle purchase in the coming years may want to consider timing their loan to take advantage of this benefit before it expires at the end of 2028.