OBBA and Car Loan Interest Deductions: What’s New?

When it comes to taxes, most people know about deductions for mortgage interest or student loans. But under the One Big Beautiful Act (OBBA), there’s a fresh update that could benefit drivers and car buyers: changes to car loan interest deductions.

lot of cars parked

What Changed?

Before OBBA, car loan interest was not deductible for most individuals. The only real exceptions applied to businesses that used vehicles for work purposes. With OBBA, the rules expand:

• Individuals can now deduct interest on qualifying car loans, up to certain limits.

• The deduction applies only to personal vehicles used for commuting and daily life — a significant shift from prior law.

• The maximum deductible interest is capped at $5,000 per year per taxpayer.

• Married couples filing jointly can deduct up to $10,000.

The Fine Print

As with many tax breaks, the details matter:

• Income Limits Apply: The deduction begins to phase out once your adjusted gross income (AGI) exceeds $100,000 for individuals or $200,000 for joint filers.

• Loan Restrictions: The vehicle must be financed through a traditional lender (bank, credit union, or dealer financing). Private loans between family or friends don’t qualify.

• No Double-Dipping: If you already deduct car expenses for business use (such as self-employed mileage or depreciation), you can’t also deduct the personal loan interest for that same vehicle.

**Qualified vehicle: A qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States.

Final assembly in the United States: The location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer's premises. Alternatively, taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) to determine whether a vehicle has undergone final assembly in the United States.

The VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA) provides plant of manufacture information. Taxpayers can follow the instructions on that website to determine if the vehicle’s plant of manufacture was located in the United States.

Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.

The taxpayer must include the Vehicle Identification Number (VIN) of the qualified vehicle on the tax return for any year in which the deduction is claimed.

Reporting: Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.

Guidance: The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements. (per the IRS website)

Who Benefits Most?

The OBBA change is designed to help middle-income Americans who rely on financing to afford reliable transportation.

• Young professionals financing their first car may see small but meaningful tax savings.

• Families with multiple vehicles could benefit even more if both spouses are paying car loans.

• High-income taxpayers may see little or no benefit because of the phaseout rules.

Final Thoughts

The OBBA’s car loan interest deduction is a new and noteworthy change that puts some money back in the pockets of everyday drivers. While it won’t erase the cost of borrowing, it can make financing a vehicle a little less painful at tax time.

If you’re currently paying off a car loan, be sure to review your eligibility and talk to your tax advisor about how this deduction fits into your overall tax picture.