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Car loan interest may be deductible under the Big Beautiful Bill (One Big Beautiful Bill Act, or OBBBA). This represents a significant update, because personal-use auto loan interest has not been deductible for decades. Under the new rule, interest on certain personal-use auto loans can now qualify for a deduction for tax years 2025 through 2028. The deduction applies only to loans originated after December 31, 2024. The maximum deduction is up to $10,000 of car-loan interest per year. This is an above-the-line deduction, meaning taxpayers do not need to itemize in order to take it.
To qualify, the vehicle must meet specific requirements. The vehicle must be new, not used. The vehicle must be for personal use, not for commercial, rideshare, or fleet purposes. The vehicle must have its final assembly in the United States. Imported vehicles or vehicles assembled outside the U.S. do not qualify. The loan must be a secured auto loan; leases do not qualify. If the loan meets all of these requirements at origination, interest on the loan remains eligible even if the loan is later refinanced.
There are several limitations to be aware of. Used vehicles do not qualify, and neither do leased vehicles. If the vehicle was not assembled in the United States, the interest is not deductible. The deduction may phase out for higher-income taxpayers based on adjusted gross income. The deduction is temporary and applies only from 2025 through 2028 unless the law is extended.
From a tax-preparation perspective, clients purchasing a new, U.S.-assembled vehicle with a qualifying loan after 2024 should be advised to track the interest paid, not just the total payment amount. Even clients who take the standard deduction can still benefit from this deduction because it is above the line. Clients should retain their loan documents, annual lender interest statements, and documentation showing the vehicle’s assembly location. This will help verify eligibility and ensure the deduction is properly applied. The deduction is not permanent, so taxpayers should be aware that the benefit is scheduled to expire after 2028 unless new legislation is passed.
Frequently Asked Questions About the New Car Loan Interest Deduction (Big Beautiful Bill / OBBBA)
1. Is car loan interest now tax deductible?
Yes. Under the Big Beautiful Bill, interest on certain personal-use auto loans can now be deductible. This applies only to loans that begin after December 31, 2024, and only for the years 2025 through 2028.
2. How much interest can I deduct?
You can deduct up to $10,000 of qualifying car-loan interest per year. This is an above-the-line deduction, which means you do not need to itemize your deductions to claim it.
3. What kind of vehicle qualifies for this deduction?
The vehicle must be new. Used vehicles do not qualify. The vehicle must be for personal use only, not for business, rideshare, or fleet purposes. The vehicle must also have its final assembly in the United States. If the vehicle was assembled outside the U.S., the interest is not deductible.
4. Do leased vehicles qualify for the deduction?
No. Lease payments do not qualify. Only secured auto loans qualify for the deduction.
5. If I refinance the loan later, do I lose the deduction?
No. If the original loan meets all qualification rules, the deduction remains in place even if you refinance the loan later.
6. Do I need to itemize to claim this deduction?
No. This is an above-the-line deduction. You can claim it even if you take the standard deduction.
7. Does income affect whether I can claim this deduction?
Possibly. The deduction may phase out for higher-income taxpayers based on adjusted gross income. The exact thresholds depend on IRS guidance and final regulations.
8. How long does this deduction last?
This deduction is temporary. It applies only for tax years 2025, 2026, 2027, and 2028. Unless Congress extends the law, the deduction expires after 2028.
9. What documents do I need to claim the deduction?
You should keep your auto loan agreement, your annual interest statement from your lender, proof of the vehicle’s assembly location, and documentation showing that the vehicle is new and for personal use.
10. How does this affect tax preparation?
If you purchase a new, U.S.-assembled vehicle after 2024, let your tax preparer know and provide your interest statement. Even if you do not itemize, you may still receive a tax benefit. Proper documentation will ensure your return is accurate and that you receive the deduction if you qualify.