The New Car Loan Interest Deduction: What It Is and How to Qualify

The New Car Loan Interest Deduction: What It Is and How to Qualify

Buying a new car in the next few years? Thanks to the One Big Beautiful Bill Act (OBBBA), you may be eligible for a valuable new tax deduction when financing a qualifying vehicle.

What Is It?

A temporary above-the-line deduction available from 2025 through 2028, allowing taxpayers to deduct up to $10,000 per year in interest paid on a qualifying new auto loan—even if they take the standard deduction.

Eligibility Requirements

1. Time Frame

   • Applies to auto loans originated between January 1, 2025, and December 31, 2028.

2. Vehicle Requirements

   • Must be a passenger-type vehicle (car, SUV, truck, van, motorcycle, etc.) under 14,000 pounds.

   • Final assembly of the vehicle must occur in the United States.

3. Loan Requirements

   • Must be a new loan for a new (or new-to-you) vehicle.

   • Leases do not qualify. Refinances may qualify if they do not exceed the original loan amount and are secured by the same vehicle.

4. Income Phase-Out

   • Begins at $100,000 MAGI for single filers and $200,000 for joint filers.

   • The deduction phases out completely at $150,000 (single) and $300,000 (joint).

5. Deduction Cap

   • Up to $10,000 per year, with a maximum of $40,000 over the four-year period.

Example: $50,000 Vehicle Purchase

• Loan amount: $45,000 at 7.5% APR over 6 years

• Interest paid in year 1: approximately $2,800

• If you’re in the 22% tax bracket and under the income threshold, you could save around $616 in taxes the first year alone.

Additional Notes

• VIN must be reported on your tax return.

• Lenders will report the loan and interest paid using IRS Form 6050AA.

• IRS guidance is forthcoming, including lists of qualifying vehicles.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute tax, legal, or financial advice. Individual situations vary, and tax laws may change. Please consult a qualified tax professional or CPA to determine how these rules apply to your specific circumstances.

Source:

AP News – “New tax break for auto loans could save some buyers thousands of dollars”