Car Loan Interest Deduction: What’s New Under the OBBBA
Published on by Ashley Duff in Advisory, Tax Services
With the passing of the One Big Beautiful Bill Act (OBBBA), a new temporary deduction for car loan interest for individual taxpayers has been introduced. Effective for tax years beginning after December 31, 2024, and before January 1, 2029, interest paid on a qualifying car loan will be deductible.
What qualifies as deductible car loan interest?
Qualifying passenger vehicle interest paid or accrued during the tax year applies to indebtedness that:
- Is incurred by the taxpayer after December 31, 2024.
- Is for the purchase of a passenger vehicle for personal use.
- Is not owed to a related party.
What type of vehicle qualifies?
- An applicable passenger vehicle that is new, with original use starting with the taxpayer.
- The vehicle must be manufactured for primary use on public roads, streets, and highways. It is required to have a minimum of two wheels (such as a car, minivan, sport utility vehicle, pickup truck, or motorcycle) and a gross vehicle weight rating of less than 14,000 pounds.
- Final assembly of the vehicle must take place in the United States.
- The vehicle must be categorized as a motor vehicle under the Clean Air Act.
What are the limitations for the deduction?
Taxpayers can deduct up to $10,000 of interest per tax year. The deduction begins to phase out once Modified Adjusted Gross Income (MAGI) exceeds $100,000 for single filers and $200,000 for joint filers. It is fully phased out at $150,000 MAGI for single filers and $250,000 for joint filers.
One more piece of good news: this deduction is available above the line, meaning taxpayers can claim it even if they do not itemize on Schedule A.
Other items to consider
Interest paid on lease financing does not qualify for the deduction. However, interest paid on refinanced loans is eligible, but only up to the amount still owed at the time of refinancing. The new loan must also be secured by a first lien on the same vehicle.
Under the new rules, lenders are required to file a new Form 6050AA with the IRS and provide a copy to the borrower by January 31st. Taxpayers must include the vehicle identification number (VIN) on their tax return for the year the interest is paid to confirm the vehicle meets the U.S. final assembly requirement.
What to do next
Have questions about how the OBBBA’s car loan interest deduction could impact you? Contact us today for a free consultation with one of our leading tax advisors. You can also explore what the OBBBA means for businesses and individuals here. As always, we’re here to help.
