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THE OBBBA CREATED A NEW tax deduction for “qualified passenger vehicle loan interest” effective 2025 through 2028.
It comes with a lot of rules and nuances, so I wanted to cover this topic a bit more in depth in case you are planning to acquire a vehicle soon.
So, what is “qualified passenger vehicle loan interest”?
It means any interest that was paid during the taxable year (e.g 2025) on a loan started after Dec. 31, 2024, secured by a first lien, on a passenger vehicle for personal use.
In simple terms, if you financed a passenger vehicle that was new (not used) in 2025 or after, for personal use, you likely can deduct the interest from this loan unless you meet some exceptions/limitations.
The maximum amount of interest you can deduct in a single year is $10,000. The deduction is available regardless whether you itemize or take the standard deduction, as long as the rest of qualifications are met.
There is also a limitation based on modified adjusted gross income (MAGI) of $100,000 (single) or $200,000 (married jointly). If you exceed these limits, the maximum deduction will be reduced by $200 for each $1,000 of income exceeding these thresholds.
For example, say you have $125,000 of MAGI and are single. Your maximum deduction will be:
$125,000 (income) – $100,000 (threshold) = $25,000.
$25,000 / $1,000 = 25
25 * $200 = $5,000 (phase out amount)
$10,000 deduction – $5,000 phase out = $5,000 maximum allowed deduction
Doing some simple math, this means that if you have $150,000 or more (single) or $250,000 (married), you can’t take the loan interest deduction.
There are some exceptions of vehicle loans that do not qualify for interest deduction:
There are also some specific rules regarding “passenger vehicle”, which means any vehicle that:
Lastly, the final assembly of the vehicle must be in the US.
For example, say you took a loan of $38,810 at 6% for 5 years to buy a brand new $45,000 MSRP 2025 Ford F-150 for personal use on January 1, 2025.
Because this vehicle was manufactured in the US and meets the requirements, you can deduct the interest (assuming below the income limits).
Using a calculator, we can estimate the first year interest from this loan at ~$2,141. If you are in a 22% marginal rate, that’s ~$470 of tax savings on the federal level.
Here’s an important point:
Don’t finance a brand new car just because you will qualify for the deduction.
In our example, that still means that you bought a $45,000 car and received ~$470 of tax savings/yr. Imagine if you bought that same car but slightly used for $30,000, which would outweigh any tax savings. So it’s important to understand why you are buying specifically that new vehicle, and there might be reasons outside of the tax savings.
This also makes an important point – there are offers from car companies that allow you to buy a car with 0% APR. In such a case, it likely would work better to drop the price and get a market rate, since you would qualify for the deduction, but more analysis is needed on the price drop vs interest charged and tax savings.
Final assembly must be in the US
This is a key requirement for the car deduction. Just because you buy a new car in 2025 doesn’t mean you will get the deduction. Which car you buy makes a difference.
The IRS recently clarified how the final assembly would work by saying “the location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer’s premises,” or “taxpayers may rely on the vehicle’s plant of manufacture as reported in the VIN number to determine if a car has undergone final assembly in the United States,” using the National Highway Traffic Safety Administration (NHTSA) VIN Decoder.
For example, I entered a random VIN (1FTFW3LDXSFA33841) for a 2025 Ford:
Once we scroll down, we can get to the section “Plant Information”:
We can see that this one is located in the United States and will likely qualify.
Refinancing
There is a lot of conflicting information online, including major finance publications, which state that if you refinance an old loan (pre-2025), this loan would qualify for the interest deduction.
But I personally disagree with that statement.
Reading the bill, it says that “Indebtedness described in subparagraph (B) shall include indebtedness that results from refinancing any indebtedness described in such subparagraph,” and the subparagraph (B) says “indebtedness incurred by the taxpayer after December 31, 2024.” Based on my interpretation, the refinancing will qualify as long as the initial loan (“indebtedness”) started after Dec. 31, 2024. I would wait until the IRS clarifies the details to make any strategic moves, though.
Also, there is a limit on how much of a loan would qualify under the deduction — only the portion of the new loan up to the amount of the original loan can be treated as qualified for tax purposes.
For example, if the original qualified loan was for $20,000, and you refinance for $22,000, only $20,000 of the new loan counts toward the deduction.
Reporting
How will you know how much interest you’ve paid on a qualified car?
Well, the tax code requires lenders (like banks, credit unions, etc.) that receive $600 or more of interest in a calendar year from an individual on a specific passenger vehicle loan to file a return with:
Think of this similarly to the mortgage statements or interest statements you receive. This informational return will include:
> Name and address of the borrower
> Interest paid
> Outstanding principal balance
> Origination date of the loan
> Vehicle details (Year, Make, Model, VIN)
However, 2025 is a transition year.
The IRS will certainly be busy releasing the forms and instructions. They’ve announced no changes to any information return forms for 2025.
There haven’t been more details about it, but for 2025, there will likely be some sort of calculator or estimate for the interest you can claim on your taxes.
Lenders will also need to figure out for 2026 how to correctly report these numbers, as only certain vehicles qualify.
Overall, the new car loan interest deduction could save you a few dollars in taxes, but make sure you aren’t overspending just to get the tax deduction.
I hope you enjoyed this post, and let me know if you have any thoughts in the comments.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational. He shares insights on taxes and personal finance through his newsletter, helping thousands of readers to make smarter financial decisions. He has over 140,000 followers on X and 110,000 on Instagram
