A new federal tax provision is making waves — but before you celebrate, let’s break down what it really means.
What Changed?
Under current tax law, most personal interest (like credit card or car loan interest) isn’t deductible. The exception has long been mortgage interest — but now, thanks to the One Big Beautiful Bill Act (OBBBA), there’s a new player: qualified passenger vehicle loan interest.
What’s the Benefit?
From 2025 through 2028, eligible taxpayers can deduct up to $10,000 per year in interest on qualifying car loans — even if they don’t itemize deductions.
But don’t be misled by the phrase “no tax on car loan interest.” This is a deduction, not a tax exemption. You’ll still pay interest, but you may reduce your taxable income.
Who Qualifies?
To claim the deduction:
- The loan must be for a new car, SUV, van, pickup, minivan, or motorcycle under 14,000 lbs.
- The vehicle must be assembled in the U.S. (check the VIN).
- The loan must be a first lien and used for personal purposes.
- Leases don’t qualify.
Income Limits
The deduction phases out starting at:
- $100,000 MAGI for single filers.
- $200,000 MAGI for joint filers.
For every $1,000 over the threshold, the deduction drops by $200. It disappears entirely at $150,000 (single) and $250,000 (joint).
What About Refinancing?
Refinanced loans still qualify if:
- The new loan is also a first lien.
- The new balance doesn’t exceed the original loan’s remaining balance.
What Doesn’t Qualify?
You can’t deduct interest on:
- Fleet vehicle loans.
- Business-use vehicles.
- Salvage or scrap vehicles.
- Loans from certain related parties.
- Lease financing.
Final Thoughts
Most Americans finance their vehicles, so this deduction could be a welcome change. But it’s not for everyone — high earners, used car buyers, and those purchasing foreign-assembled vehicles won’t qualify.
Questions? Reach out to your tax advisor to see how this applies to your situation.