Car Loan Interest Is Now Tax Deductible: How to Claim the OBBBA Deduction (2025-2028)
The OBBBA created a new above-the-line deduction for interest on new car loans. Learn who qualifies, income phaseout limits, how to claim it, and how much you could save from 2025 to 2028.
For the first time in U.S. tax history, the interest you pay on a new car loan is tax deductible. The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, created a brand-new above-the-line deduction that lets you deduct up to $10,000 per year in auto loan interest from your federal taxes — no itemizing required.
For the average new car buyer financing $35,000 to $50,000, this deduction could save $1,000 to $3,000 or more over four years depending on your loan terms and tax bracket. The deduction is available for tax years 2025 through 2028.
Use our Car Loan Interest Deduction Calculator to see exactly how much you could save based on your specific loan, income, and filing status.
What Is the OBBBA Car Loan Interest Deduction?
The OBBBA auto loan interest deduction is one of four new tax deductions created by the One Big Beautiful Bill Act. It allows taxpayers who finance a new vehicle for personal use to deduct the interest paid on that loan, up to $10,000 per year, from their federal taxable income.
This is an above-the-line deduction, which means you do not need to itemize to claim it. It is reported on the new Schedule 1-A and flows to Form 1040 line 13b. Because it reduces your adjusted gross income (AGI), it can also help you qualify for other income-based tax credits and deductions.
The deduction applies to tax years 2025, 2026, 2027, and 2028 only. It expires automatically after the 2028 tax year unless Congress acts to extend it.
Before the OBBBA, car loan interest was never deductible for personal vehicles. Only mortgage interest and, in some cases, student loan interest could be deducted. This provision is a significant change that directly benefits millions of Americans who finance new car purchases.
Who Qualifies?
To claim the car loan interest deduction, you must meet all of the following requirements:
- You purchased a new vehicle — Used cars, certified pre-owned vehicles, and vehicles purchased from private sellers do not qualify. The vehicle must be new at the time of purchase.
- The vehicle is for personal use — Business vehicles, fleet vehicles, and vehicles used primarily for commercial purposes do not qualify. If you use your car for business, you already have access to business deductions like Section 179 expensing.
- You have a loan (not a lease) — Only interest on auto loans qualifies. Lease payments are not deductible under this provision. If you paid cash for the vehicle, there is no interest to deduct.
- Your MAGI is below the phaseout ceiling — The deduction phases out at higher incomes. Single and head of household filers are fully phased out at $150,000 MAGI. Married filing jointly filers are fully phased out at $300,000 MAGI.
- The tax year is 2025, 2026, 2027, or 2028 — The deduction does not exist before 2025 or after 2028 under current law.
Note: There is no U.S. assembly requirement for this deduction. The domestic assembly requirement applies to the Clean Vehicle Tax Credit (EV credit), which is a completely separate program. You can deduct interest on a loan for any new vehicle regardless of where it was manufactured.
Income Limits and Phaseout
The auto loan interest deduction is subject to income phaseouts based on your modified adjusted gross income (MAGI) and filing status. The phaseout reduces your deduction by $200 for every $1,000 (or fraction thereof) that your MAGI exceeds the threshold.
| Filing Status | Phaseout Begins | Full Phaseout |
|---|---|---|
| Single | $100,000 | $150,000 |
| Head of Household | $100,000 | $150,000 |
| Married Filing Jointly | $200,000 | $300,000 |
| Married Filing Separately | $100,000 | $150,000 |
How the Phaseout Works: An Example
Suppose you are a single filer with a MAGI of $110,000 and you paid $3,000 in auto loan interest this year.
- Your MAGI exceeds the $100,000 threshold by $10,000
- Divide the excess by $1,000: $10,000 ÷ $1,000 = 10
- Multiply by $200: 10 × $200 = $2,000 reduction
- Subtract the reduction from your interest paid: $3,000 − $2,000 = $1,000 deduction
If the reduction exceeds the interest you paid, your deduction is zero. For example, a single filer earning $130,000 with $3,000 in interest would see a reduction of $6,000 (30 × $200), which eliminates the deduction entirely.
How Much Can You Save?
The actual dollar savings depend on your loan amount, interest rate, loan term, tax bracket, and income level. Below are three real-world examples with verified amortization math.
Example 1: $35,000 Loan at 6.5% APR (Single Filer, $80,000 Income)
Sarah finances a new sedan with a $35,000 loan at 6.5% APR for 60 months. She files as single with a MAGI of $80,000, well below the $100,000 phaseout threshold.
- Monthly payment: $684.27
- First-year interest paid: $2,176
- Full deduction (no phaseout): $2,176
- Tax bracket: 22%
- First-year federal tax savings: $479
Over the four eligible tax years (2025-2028), Sarah would deduct a total of roughly $7,200 in interest, saving approximately $1,580 in federal taxes at the 22% rate. Her interest payments decrease each year as the loan amortizes, but the deduction captures all of it since it stays well under the $10,000 annual cap.
Example 2: $50,000 Loan at 7.0% APR (Married Filing Jointly, $180,000 Income)
The Johnsons finance a new SUV with a $50,000 loan at 7.0% APR for 72 months. They file jointly with a combined MAGI of $180,000, below the $200,000 MFJ phaseout threshold.
- Monthly payment: $854.46
- First-year interest paid: $3,378
- Full deduction (no phaseout): $3,378
- Tax bracket: 22%
- First-year federal tax savings: $743
Over four years, the Johnsons would deduct approximately $11,600 in total interest (capped at $10,000 per year, though their annual interest stays below that). At a 22% rate, that saves them roughly $2,550 in federal income taxes.
Example 3: Partial Deduction in the Phaseout Range (Single Filer, $110,000 Income)
David has a MAGI of $110,000 and paid $3,000 in auto loan interest this year. As a single filer, his phaseout threshold is $100,000.
- Excess over threshold: $110,000 − $100,000 = $10,000
- Reduction: ($10,000 ÷ $1,000) × $200 = $2,000
- Allowed deduction: $3,000 − $2,000 = $1,000
- Tax bracket: 24%
- Federal tax savings: $240
Even with the phaseout, David still saves $240 this year. Without the deduction, he would have saved nothing. The phaseout reduces the benefit but does not always eliminate it.
How to Claim the Deduction
Claiming the car loan interest deduction is straightforward. Follow these steps when filing your federal tax return:
Step 1: Get Your Interest Statement
Your lender is required to report interest of $600 or more annually. You will receive a year-end statement or Form 1098 from your auto lender showing the total interest paid during the tax year. If you do not receive one, contact your lender or check your online loan account for an annual interest summary.
Step 2: Report on Schedule 1-A
Enter the amount of auto loan interest paid on the new Schedule 1-A, which was created specifically for OBBBA deductions. If your income is in the phaseout range, calculate the reduced amount before entering it.
Step 3: Transfer to Form 1040
The deduction amount from Schedule 1-A flows to Form 1040, line 13b. This reduces your AGI, which is calculated before you apply the standard deduction or itemized deductions. Because it lowers your AGI, it can help you qualify for other income-based credits and deductions that have AGI thresholds.
Step 4: Keep Documentation
Retain your loan agreement, purchase documents (showing the vehicle was new), and annual interest statements for at least three years after filing. If audited, you will need to prove the vehicle was new, for personal use, and that the interest amount is accurate.
Common Mistakes to Avoid
1. Trying to deduct interest on a used car
This is the most common error. The deduction applies only to new vehicles. If you bought a used car, even a recent model year or certified pre-owned, you cannot deduct the loan interest. There are no exceptions.
2. Confusing this with the EV tax credit
The OBBBA auto loan interest deduction and the Clean Vehicle Tax Credit (EV credit) are completely different programs. The EV credit is a dollar-for-dollar tax credit of up to $7,500 for qualifying electric vehicles and has its own MSRP caps, income limits, and U.S. assembly requirements. The auto loan interest deduction is a deduction (not a credit), has no assembly requirement, and applies to any new vehicle regardless of fuel type. You can potentially claim both on the same vehicle if it qualifies for each.
3. Trying to deduct lease payments
Only loan interest is deductible. If you lease your vehicle, no portion of your monthly payment qualifies for this deduction. This is true even though lease payments include a money factor (implicit interest charge). The law specifically requires a loan.
4. Forgetting about the income phaseout
The phaseout starts at $100,000 MAGI for single filers and $200,000 for MFJ. If your income is above these thresholds, your deduction is reduced or eliminated. Use the Car Loan Interest Deduction Calculator to check whether the phaseout affects you.
5. Claiming the deduction for a business vehicle
If you use your vehicle for business purposes, the OBBBA personal-use deduction does not apply. Business vehicles have their own deductions including Section 179 expensing, MACRS depreciation, and the standard mileage rate. These existing business deductions are often more valuable than the OBBBA personal-use deduction. Consult a tax professional if you have a mixed-use vehicle.
6. Assuming the deduction lasts forever
The deduction applies to tax years 2025 through 2028 only. If you have a 72-month loan, you can only deduct interest paid during those four years. Interest paid in 2029 and beyond is not deductible under current law, even if your loan originated during the eligible window.
Car Loan Interest Deduction vs. EV Tax Credit
These two provisions are frequently confused. Here is how they compare:
| Feature | Auto Loan Interest Deduction | Clean Vehicle Tax Credit (EV Credit) |
|---|---|---|
| Type | Tax deduction (reduces taxable income) | Tax credit (reduces tax owed dollar-for-dollar) |
| Maximum benefit | $10,000/year in deductible interest | Up to $7,500 one-time credit |
| Vehicle type | Any new vehicle (gas, hybrid, EV) | Qualifying electric or plug-in hybrid only |
| U.S. assembly required? | No | Yes (final assembly in North America) |
| Financing required? | Yes (must have a loan) | No (cash or financed) |
| Can you claim both? | Yes, if the vehicle meets both sets of requirements | |
| Expires | After 2028 | Varies by provision |
If you are buying a new electric vehicle that qualifies for the EV credit and you finance it with a loan, you could potentially claim both the $7,500 credit and deduct your loan interest. For a $45,000 EV with a $35,000 loan at 6.5%, this could mean $7,500 in credits plus roughly $1,900 in first-year tax savings from the interest deduction — a combined benefit of over $9,000 in the first year alone.
Key Takeaways
- The OBBBA created a new above-the-line deduction for interest on new car loans, effective for tax years 2025 through 2028
- The maximum deduction is $10,000 per year in interest paid
- The vehicle must be new (not used) and for personal use (not business)
- You must have a loan — leases and cash purchases do not qualify
- There is no U.S. assembly requirement (that applies to the EV credit, a different program)
- Income phaseouts begin at $100,000 MAGI for single/HOH filers and $200,000 for MFJ
- The deduction is reported on Schedule 1-A and Form 1040 line 13b — no itemizing needed
- You can potentially stack this deduction with the EV tax credit if buying a qualifying electric vehicle
- Use our calculator or consult a tax professional to determine your specific savings
Disclaimer: This article is for informational purposes only and does not constitute tax advice. Tax laws are complex and individual circumstances vary. Consult a qualified tax professional or CPA before making decisions based on the information in this guide. While we strive for accuracy, tax rules can change and IRS guidance may differ from preliminary interpretations.
Frequently Asked Questions
Can I deduct car loan interest on a used car?
No. The OBBBA auto loan interest deduction applies only to new vehicles. If you purchased a used or certified pre-owned vehicle, the interest on that loan is not deductible under this provision. There is no workaround or exception for used cars regardless of condition or price.
Can I deduct interest on a car lease?
No. The deduction applies exclusively to loan interest, not lease payments. Even though a portion of each lease payment covers a financing charge, the IRS does not treat lease payments as deductible interest under this provision. If you lease a vehicle, you cannot claim any portion of your payments under the OBBBA auto loan interest deduction.
Can I claim this deduction and the EV tax credit on the same vehicle?
Yes, potentially. The OBBBA auto loan interest deduction and the Clean Vehicle Tax Credit (Section 30D) are separate programs with separate requirements. If you purchase a new electric vehicle that qualifies for the EV credit and you finance it with a loan, you can claim both the EV credit (up to $7,500) and deduct the loan interest (up to $10,000 per year). The EV credit has its own eligibility rules including MSRP caps and assembly requirements that do not apply to the loan interest deduction.
Does the car need to be assembled in the United States?
No. There is no U.S. assembly requirement for the auto loan interest deduction. The domestic assembly requirement applies to the Clean Vehicle Tax Credit (EV credit), which is an entirely different program. Any new vehicle purchased for personal use qualifies for the loan interest deduction regardless of where it was manufactured.
What if my income is in the phaseout range?
Your deduction is reduced by $200 for every $1,000 (or fraction thereof) that your MAGI exceeds the phaseout threshold for your filing status. For example, a single filer with $110,000 MAGI exceeds the $100,000 threshold by $10,000, so the deduction is reduced by $2,000 (10 times $200). If the reduction exceeds your interest paid, the deduction is zero.
Do I need to itemize to claim this deduction?
No. The auto loan interest deduction is an above-the-line deduction reported on Schedule 1-A and Form 1040 line 13b. You can claim it whether you take the standard deduction or itemize. It reduces your adjusted gross income, which can also help you qualify for other income-based tax benefits.
What if I use my car for both personal and business purposes?
The OBBBA auto loan interest deduction is for personal-use vehicles only. If you use your vehicle for business, you already have access to business deductions such as Section 179 expensing, MACRS depreciation, or the standard mileage rate. You cannot claim the OBBBA personal-use deduction on a vehicle that is used for business purposes. If you have a mixed-use vehicle, consult a tax professional about which deduction method is most advantageous.
What happens after 2028?
The auto loan interest deduction expires after the 2028 tax year unless Congress passes legislation to extend it. If you have a 60- or 72-month loan that extends beyond 2028, you can only deduct interest paid during the 2025-2028 tax years. Interest paid in 2029 and beyond would not be deductible even if the loan originated during the eligible period.