Signed into law on July 4, 2025, the One Big Beautiful Bill Act (officially the ‘Big Beautiful Bill,’ or OBBBA) is a sweeping tax and budget package. Among its many changes, one measure stands out for individuals and the auto market: a new auto loan interest deduction available beginning in tax year 2025! Important details and limitations of this new tax law are detailed below.

What Is the Auto Loan Interest Deduction?

This provision allows eligible taxpayers to deduct interest on qualifying auto loans for U.S.-assembled vehicles. Key features of this new tax law include:

• Deduction Limit: Up to $10,000 per year in interest on qualifying auto loans.
• Eligibility Window: Applies to loans signed after December 31, 2024, and is available for tax years 2025 through 2028.
• Income Phase out –
  • Begins at $100,000 modified adjusted gross income (MAGI)* for single filers.
  • Begins at $200,000 MAGI for joint filers.
  • Deduction is reduced by $200 for every $1,000 above the threshold, completely phased out at $150,000 for single and $250,000 for married filing jointly filers.

* What is MAGI – Modified adjusted gross income (MAGI) is your total income after certain deductions and exclusions, and it’s used to determine eligibility for tax benefits like the new auto loan interest deduction.

• Above-the-Line Deduction: Available whether you take itemized deductions or take the standard deduction.

What Vehicles Are Eligible?

To qualify, the vehicle and loan must meet the following requirements:

• Vehicle’s Criteria (must meet all three):
  • New (not used or pre-owned)
  • Assembled in the United States
  • A passenger vehicle – Such as:
    • Cars, minivans, SUVs, pickup trucks, and motorcycles.
• Loan Must Be:
  • A standard auto loan (not a lease),
  • Arm’s-length (no related-party financing, such as family members or a related business), and
  • Used exclusively or partially for personal or business transportation.

Note: Commercial vehicles and imported vehicle models are not eligible.

• Interest Paid (not principal payments).
• Deduction is applied per taxpayer (not per vehicle or loan).

Business Use: How the Deduction Works for Self-Employed Taxpayers

Self-employed individuals or those using vehicles for mixed personal/business purposes may still qualify.

• Calculate the percentage of personal use (e.g., 60% personal / 40% business).
• Apply that percentage to your total annual loan interest.

Example:
If you paid $6,000 in interest and used the car 70% personally, your allowable deduction is $4,200.

Business-related interest may still be deductible separately under existing rules, depending on your filing situation.

Compliance Requirements

• New IRS Form 1098 (Expected) – A new version of Form 1098 (similar to mortgage interest reporting) will likely be issued by your lender starting in 2026 for 2025 interest.
• Document Retention – To claim the deduction on your tax return, you should retain the following documents:
  • Loan Agreement
  • Vehicle Information (year, make, model, and VIN)
  • Proof that the vehicle was assembled in the U.S. (e.g., window sticker or manufacturer certificate).
  • Interest Payment Records (monthly statements or annual summary)

Questions?

For further guidance or personalized advice on this deduction, please contact your Polk and Associates advisor.

This article is for informational purposes only and should not be construed as tax advice.

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