OBBBA Car Loan Interest Tax Deduction: Complete Guide
What Is the Car Loan Interest Deduction?
The One Big Beautiful Bill Act (OBBBA) introduced a new above-the-line tax deduction for interest paid on loans for new motor vehicles. This deduction is available for tax years 2025 through 2028 and allows eligible taxpayers to deduct up to $10,000 per year in auto loan interest from their taxable income.
Because it is an above-the-line deduction (reported on Schedule 1-A, flowing to Form 1040 line 13b), you do not need to itemize your deductions to claim it. It directly reduces your Adjusted Gross Income (AGI).
Who Qualifies?
To qualify for the car loan interest deduction, you must meet all of the following requirements:
- New vehicle only: The vehicle must be new — the first transfer from the manufacturer or dealer to the buyer. Used, pre-owned, and certified pre-owned vehicles do not qualify.
- Personal use: The vehicle must be primarily for personal use. Business vehicles are excluded because business owners already have existing deductions for vehicle expenses (Section 179, MACRS depreciation, etc.).
- Motor vehicle: The vehicle must be a motor vehicle — cars, trucks, SUVs, vans, and motorcycles all qualify.
- Loan financing: You must have financed the purchase with a loan. Leases and cash purchases do not qualify.
- Tax year 2025-2028: The interest must be paid during tax years 2025 through 2028.
Income Phaseout Rules
The deduction phases out for higher-income taxpayers based on Modified Adjusted Gross Income (MAGI):
- Single / Head of Household: Phaseout begins at $100,000 MAGI, fully eliminated at $150,000
- Married Filing Jointly: Phaseout begins at $200,000 MAGI, fully eliminated at $300,000
- Married Filing Separately: Phaseout begins at $100,000 MAGI, fully eliminated at $150,000
The formula reduces the deduction by $200 for every $1,000 (or fraction thereof) of MAGI above the starting threshold. For example, a Single filer with $125,000 MAGI would have their deduction reduced by $200 x 25 = $5,000.
How to Calculate Your Tax Savings
Your actual tax savings depend on three factors:
- Interest paid: How much loan interest you paid during the tax year (determined by your loan amount, interest rate, and loan term using standard amortization).
- Deduction amount: The lesser of your interest paid or $10,000, minus any phaseout reduction based on your income.
- Marginal tax rate: Your federal tax bracket determines how much each dollar of deduction saves you. A $5,000 deduction in the 22% bracket saves $1,100 in taxes.
Example Calculation
A Single filer with $85,000 MAGI finances a $35,000 new car at 5.9% APR for 60 months. In the first full year, they pay approximately $1,850 in interest. Since their MAGI is below the $100,000 phaseout threshold, they can deduct the full $1,850. At a 22% marginal rate, this saves them about $407 in federal taxes.
How to Claim the Deduction
Report the deduction on Schedule 1-A of your federal tax return. The amount flows to Form 1040, line 13b. Your lender will provide Form 1098 showing interest paid during the year, similar to mortgage interest reporting. Keep records of your vehicle purchase (showing it was new) and your loan documents.
Important Notes
- There is no requirement for the vehicle to be assembled in the United States. That requirement applies only to the EV tax credit (Section 30D), not the loan interest deduction.
- This deduction can be claimed in addition to the Clean Vehicle Tax Credit if you purchase an eligible electric vehicle.
- The deduction is per return, not per vehicle. If you have multiple qualifying loans, the combined interest is still subject to the $10,000 annual cap.