Fueling Affordability: How the OBBBA Helps Car Buyers

If you are planning to purchase a vehicle in the near future, there is a new tax deduction you will want to know about when considering your options.  The One Big Beautiful Bill Act (OBBBA) includes a new tax deduction for interest paid on a loan used for purchasing qualifying vehicles.  There is more to “No Tax on Car Loan Interest” that should be considered.  Let’s dig a little deeper.   

What is the Deduction? 

From 2025 through 2028, taxpayers can deduct up to $10,000 per year on interest paid on a loan used to purchase a qualified vehicle.  This deduction is available for both itemizing taxpayers and taxpayers taking the standard deduction.  It phases out for taxpayers with a modified adjusted gross income over $100,000 ($200,000 for joint filers). 

What is a “Qualified Vehicle?”  

To qualify for the deduction, the vehicle must meet certain qualifications.  

The vehicle must: 

• be new; 
• be a car, SUV, van, pick-up truck, minivan, or motorcycle;  
• be used for personal use, meaning it cannot be used for business or commercial purposes; 
• weigh less than 14,000 pounds; and  
• have undergone final assembly in the United States. 

Interest paid on a loan to purchase a used car cannot be deducted.  Heavy, large vehicles are not qualified vehicles, which include most large vehicles used for business or commercial use.  Cars that have undergone final assembly in a foreign country do not qualify. 

How to Verify Assembly Location 

The location of final assembly should be listed on the vehicle’s window sticker at the dealership.  Taxpayers may also find the location of the vehicle’s final assembly location using the vehicle identification number (VIN).  The VIN Decoder on the National Highway Traffic Safety Administration (NHTSA) website provides information on the location of a vehicle’s final assembly.   

Loan Requirements 

Not all car loans qualify for the deduction.  As stated above, the loan must be used to purchase a new car.  Loans used to purchase a used car do not qualify.  The loan must originate after December 31, 2024, and must be secured by a lien on the vehicle.  If a taxpayer refinances the loan, the interest on a refinanced amount still qualifies.  

Lender Reporting 

Lenders will be required to file information returns with the IRS and send statements to taxpayers that show the total interest paid, loan origination date, vehicle year, make, model, VIN, and the outstanding principal at the beginning of the year.  The IRS will offer transition relief for tax year 2025 for interest recipients subject to new reporting requirements.   

The deduction is meant to incentivize taxpayers to purchase new vehicles that have undergone final assembly in the United States.  The hope is that the deduction will help make vehicle ownership more accessible and will result in an increase in car sales for dealers and manufacturers which will support the American automotive industry and its workforce.  Consider this deduction the next time you are in the market for a new vehicle.   It could be the determination factor of which vehicle you choose and how you want to pay for it.