What is the qualified passenger vehicle loan interest deduction?
Under current federal income tax rules, so-called personal interest expense generally can’t be deducted. One big exception is qualified residence interest or home mortgage interest, which can be deducted, subject to some limitations, if you itemize deductions on your tax return.
The One Big Beautiful Bill Act (OBBBA) adds another exception for eligible car loan interest. In tax law language, the new deduction is called qualified passenger vehicle loan interest. Are you eligible? Here are the rules.
“No tax” isn’t an accurate description.
If you could deduct all your car loan interest, you’d be paying it with pre-tax dollars rather than with post-tax dollars — meaning after you paid your federal income tax bill. The new deduction has been called “no tax on car loan interest,” but that’s not really accurate. Here’s a more precise explanation.
The OBBBA allows eligible individuals — including those who don’t itemize — a temporary new deduction for some or all of the interest paid on some loans. The loans must be taken out to purchase a qualifying passenger vehicle.
Specifically, for 2025 through 2028, up to $10,000 of car loan interest can potentially be deducted each year. The loan must be taken out after December 31, 2024 and must be a first lien secured by the vehicle, which is used for personal purposes. Leased and commercial vehicles don’t qualify. So far, this may sound good, but not all buyers will qualify for the new deduction because of the limitations and restrictions summarized below.
Income-based Phaseout Rule
The deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married joint-filing couples. If your MAGI is above the applicable threshold, the amount that you can deduct (subject to the $10,000 limit) is reduced by $200 for each $1,000 of excess MAGI. So, for an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000. For married joint filers, the deduction is completely phased out when MAGI reaches $250,000.
Qualifying Vehicles
To qualify for the new deduction, the vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds. It must be manufactured primarily for use on public streets, roads and highways, and it must be new (meaning the original use begins with you). The “final assembly” of the vehicle must occur in the United States. You must report the vehicle identification number (VIN) on your tax return. Vehicles assembled in America have a 1,4 or 5 as the first character of the VIN to signify that.
Meeting the Requirements
In the law, the definition of final assembly is convoluted. The law states: “Final assembly means the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”
Another requirement is that your car loan lender must file an information return with the IRS that shows the amount of interest paid during the year on your qualified car loan and provides you with a copy.
Refinanced Loans
If an original qualified car loan is refinanced, the new loan will be a qualified loan as long as: 1) the new loan is secured by a first lien on the eligible vehicle and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.
Ineligible Loans
Interest on the following types of loans doesn’t qualify for the new deduction:
- Loans to finance fleet sales,
- Loans to buy a vehicle not used for personal purposes,
- Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts,
- Loans from certain related parties, and
- Any lease financing.
Be Proactive.
It’s also important to consider the long-term cost of ownership, including depreciation, insurance, and maintenance, before relying on the deduction as a financial advantage. Depreciation may outweigh the tax savings so it’s important to plan and evaluate whether the long term-financial impact of buying a new vehicle aligns with your overall tax and budget strategy.
According to various reports, most American car buyers rely on loans to finance their purchases. So, the ability to deduct car loan interest is something that many taxpayers would be happy about. That said, many buyers won’t qualify for the new deduction. It’s off limits for high-income purchasers, used vehicle buyers and those who buy foreign imports.
The Wegner CPAs tax advisors can help you determine whether you qualify for this new deduction and work with you to align it with your overall tax planning strategy. Get in touch to discuss your options.
