Understanding the New Auto Loan Interest Deduction

As a Certified Public Accountant with over 15 years of experience guiding clients through complex tax provisions, I’m eager to explain the new auto loan interest deduction introduced by the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, as Public Law 119-21.

This temporary above-the-line deduction, available for tax years 2025 through 2028, allows eligible taxpayers to deduct up to $10,000 annually in interest paid on qualifying auto loans. It’s a significant opportunity for clients purchasing new, U.S.-assembled vehicles.

Below, I’ll outline the provision’s details, eligibility requirements, and potential tax savings with practical examples to help you advise clients or plan your own finances.

Overview of the Deduction

The OBBBA revives a form of personal auto loan interest deductibility, not seen since the 1980s, to encourage new vehicle purchases while supporting U.S. manufacturing. This above-the-line deduction, reported on Schedule 1 (Form 1040), can be claimed whether clients itemize or take the standard deduction. It covers interest paid on loans for new, U.S. assembled passenger vehicles, capped at $10,000 per year, with excess interest carrying forward within the 2025–2028 period. The Joint Committee on Taxation estimates this provision will cost the Treasury $31 billion, underscoring its value for taxpayers.

Eligibility Criteria

To qualify, taxpayers, vehicles, and loans must meet specific criteria:

Taxpayer Eligibility:

• Available to individuals filing federal returns for personal-use vehicles (business use is deductible separately, e.g., via Schedule C).
• Modified adjusted gross income (MAGI) limits:
• Full deduction: MAGI up to $100,000 (single) or $200,000 (married filing jointly). Phase-out: Starts above $100,000/$200,000, fully eliminated at $149,000 (single) or $249,000 (joint). The deduction reduces linearly during phase-out (e.g., at $224,500 joint MAGI, it’s halved).

Vehicle Requirements:

• Must be a new (not used) passenger vehicle, including cars, trucks, SUVs, vans, minivans, motorcycles, or pickups with a gross vehicle weight rating (GVWR) under 14,000 pounds.
• Final assembly must occur in the U.S. (e.g., Ford F-150, Chevrolet Silverado, Jeep Wrangler, Tesla Model 3). Dealers provide certification, and the IRS may publish a qualifying list, similar to EV credit guidance.
• Purchased between January 1, 2025, and December 31, 2028.

Loan Requirements:

• Loan must be secured by the vehicle and originated on or after January 1, 2025.
• Leases are ineligible.
• Lenders must report interest of $600 or more to the IRS via Form 1098-AA (new for 2025) and provide taxpayers with a statement for filing.
• Interest is deductible in the year paid, up to $10,000 annually.

Claiming the Deduction

Clients report the deduction on Schedule 1 (Form 1040), using the vehicle’s VIN and lender-provided interest statements. The IRS offers transition relief for 2025 filers to ease compliance with new reporting, such as Form 1098-AA. Interest exceeding $10,000 in a year can carry forward to later years within 2025–2028. For instance, if a client pays $12,000 in interest in 2026, they deduct $10,000 in 2026 and carry $2,000 to 2027, subject to MAGI limits.

Interaction with EV Credits

The OBBBA shortens the timeline for Inflation Reduction Act EV credits:

• New EV credit (up to $7,500) and used EV credit (up to $4,000) expire September 30, 2025, earlier than the original 2032 sunset.
• For vehicles purchased before October 1, 2025, clients can combine the EV credit with the interest deduction if the vehicle is a new, U.S.-assembled EV, creating a unique 2025 savings opportunity.

Tax Savings Examples

Savings depend on a client’s marginal tax bracket and interest paid, which decreases over time in an amortizing loan. Here are two examples to illustrate.

Example 1: Single Filer, Lower Income

• Profile: Single taxpayer, $80,000 MAGI, 22% federal tax bracket (projected 2025 bracket: $47,151–$100,525 taxable income).
• Purchase: January 1, 2025, buys a $40,000 U.S.-assembled SUV with a 60-month loan at 6% APR. Monthly payment: ~$773.
• Interest and Savings (based on amortization):
• 2025: Interest ~$2,200 → Deduction: $2,200 → Savings: $2,200 × 22% = $484.
• 2026: Interest ~$1,800 → Deduction: $1,800 → Savings: $396.
• 2027: Interest ~$1,400 → Deduction: $1,400 → Savings: $308.
• 2028: Interest ~$900 → Deduction: $900 → Savings: $198.
• Total Savings (2025–2028): ~$1,386.
• Notes: Modest savings reflect lower interest and a shorter loan term. An early-year purchase maximizes 2025 interest.

Example 2: Married Couple, Higher Income

• Profile: Married filing jointly, $200,000 MAGI (at full-deduction threshold), 22% bracket (projected 2025 bracket: $94,301–$201,050 taxable income, assuming ~$29,200 standard deduction).
• Purchase: July 1, 2025, buys a $50,000 U.S.-assembled pickup with a 72-month loan at 7% APR. Monthly payment: ~$885.
• Interest and Savings (based on amortization):
• 2025: Interest (6 months, Jul–Dec) ~$1,700 → Deduction: $1,700 → Savings: $1,700 × 22% = $374.
• 2026: Interest (full year) ~$3,200 → Deduction: $3,200 → Savings: $704.
• 2027: Interest ~$2,900 → Deduction: $2,900 → Savings: $638.
• 2028: Interest ~$2,500 → Deduction: $2,500 → Savings: $550.
• Total Savings (2025–2028): $2,266.
• Notes: If MAGI rises to $224,500, the deduction halves (e.g., 2026: $3,200 × 50% = $1,600 → $352 savings). If the vehicle is an EV purchased before September 30, 2025, a $7,500 EV credit could increase 2025 savings to $7,874.

Planning Considerations

1. Timing: Encourage clients to buy early in the year to maximize deductible interest in that tax year. A January purchase yields more interest than a July one.
2. Phase-Out Risk: For clients near MAGI thresholds ($100,000/$200,000), model potential income spikes (e.g., bonuses, capital gains) to assess phase-out impacts.
3. EV Strategy: For EV buyers, purchasing before September 30, 2025, to claim the $7,500 credit alongside the interest deduction can significantly boost savings.
4. Verification: Confirm vehicle eligibility via dealer certification or IRS lists. Retain lender statements for audit purposes.
5. Business Use: For business-use vehicles, explore Schedule C deductions, which may offer greater benefits without MAGI limits.

Conclusion

The OBBBA auto loan interest deduction offers a valuable opportunity to reduce the cost of new vehicle ownership, especially for U.S.-assembled models. Savings vary by loan size, interest rate, and tax bracket, with higher-income clients on longer loans benefiting most—up to $2,266 over four years in our married couple example. However, CPAs should highlight MAGI phase-outs and the 2028 sunset. For 2025, leveraging IRS transition relief and combining with EV credits (if applicable) can maximize benefits. Always verify vehicle eligibility and check

IRS.gov

for guidance. Tailored advice based on clients’ financials is essential for optimal planning.

Disclaimer: This article is for informational purposes and not formal tax advice. Consult a tax professional for individual circumstances.

Sources:

• IRS guidance on OBBBA deductions
• Bipartisan Policy Center analysis of P.L. 119-21
• Joint Committee on Taxation revenue estimates
• Treasury Department FAQs on Form 1098-AA
• Kelley Blue Book data on average auto loan rates (6.73%–7% for 2025 projections)