Understanding the OBBBA car loan interest deduction

The car loan interest deduction is a temporary federal tax benefit that allows eligible taxpayers to deduct interest paid on qualifying new vehicle loans. Congress enacted this provision to encourage domestic vehicle manufacturing and ease the financial burden of purchasing a new car.

The deduction may be claimed by:

• Individuals
• Decedents’ estates
• Non grantor trusts

Taxpayers may claim the deduction whether they itemize or take the standard deduction.

The deduction applies to:

• Tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029
• Loans originated after Dec. 31, 2024

Keep in mind that only interest paid or accrued during these tax years qualifies for the deduction.

The deduction is subject to (1) income limits and (2) an annual cap.

1. Income limits

The available deduction phases out based on modified adjusted gross income (MAGI):

• Phaseout begins at:

o   $100,000 for single filers

o   $200,000 for married filing jointly

• Fully phased out at:

o   $150,000 for single filers

o   $250,000 for married filing jointly

Taxpayers with MAGI within these ranges receive only a partial deduction; those above the upper thresholds receive none.

2. Annual cap

The deduction is capped at $10,000 per return. This limit applies regardless of filing status–single and joint filers have the same $10,000 cap.

Only new vehicles that meet specific requirements (detailed below) are eligible. Used vehicles do not qualify. Those vehicles meeting the requirements are defined as a ‘qualifying vehicle.’

A qualifying vehicle is one that must:

• Be brand‑new (original use begins with the taxpayer);
• Be used primarily for personal purposes (more than 50%);
• Have its final assembly occur in the United States; and
• Fall within one of the following categories:
   
  • Passenger car
  • SUV
  • Minivan
  • Pickup truck
  • Certain motorcycles

Taxpayers may confirm U.S. final assembly using the vehicle’s information label or VIN, detailed in the proposed regulations. Vehicles used for commercial, fleet or business purposes (other than as an employee) generally do not qualify.

To qualify, the loan must:

• Originate after Dec. 31, 2024;
• Be secured by the vehicle via a first lien;
• Be used exclusively to purchase the qualifying vehicle;
• Have interest paid or accrued by the taxpayer during the tax year;
• Generally not be a refinance;
• Not be from a related party; and
• Not be a lease (leases do not qualify)

Taxpayers must also report the vehicle identification number (VIN) each year the deduction is claimed.