OBBBA Auto Loan Interest Deduction: Up to $10,000 Per Year

#What’s new about this

Auto loan interest has generally not been deductible on federal taxes for personal use. That’s been true since the Tax Reform Act of 1986. That law ended the personal-interest deduction for everything except mortgage interest. Business use stayed different. Interest on a business vehicle has stayed deductible as a business expense. But the personal-use side has been a no-deduction zone for 40 years.

OBBBA undid part of this, for tax years 2025-2028. Now, up to $10,000 a year of qualifying personal-vehicle loan interest is federally deductible.

This deduction is narrow. It won’t apply to everyone. But for households with big auto loans, especially on pricier vehicles bought after 2024, it can mean real savings each year.

#What qualifies as a “qualifying vehicle”

The vehicle must meet specific conditions, per the OBBBA text and IRS guidance:

• The vehicle must be new. You must be the first owner. A used car does not qualify, even if you buy it from a dealer.
• Bought after the effective date. Most provisions take effect January 1, 2025.
• Loan secured by the vehicle. A typical auto loan works. A HELOC or personal loan used for the vehicle does not.
• Owned by the taxpayer (or co-owned in a qualifying way).
• The vehicle must be new, built with final assembly in the U.S., and weigh under 14,000 pounds. It can be a car, van, SUV, pickup, or motorcycle. Your loan must start after December 31, 2024. The car must secure the loan. You must list the VIN on your return.

Leases do not qualify. A loan you took before 2025 does not qualify. A refinance of a qualifying loan can qualify, up to the amount you refinanced. Extra amounts added to the loan, like old car debt, do not qualify.

#What this means for ETS clients

#For ETS clients with personal vehicle loans

Did you buy a personal-use vehicle with a loan after January 1, 2025? Then the interest on that loan is now deductible, up to $10K a year. For most ETS clients, the actual interest paid caps this, not the $10K limit.

Example calculations:

These examples assume no down payment and income under $100,000 ($200,000 joint).

• $50,000 vehicle, 60-month loan at 6.5%, interest paid year-1: about $3,000. Full amount deductible.
• $80,000 vehicle, 72-month loan at 7%, interest paid year-1: about $5,200. Full amount deductible.
• $150,000 vehicle, 60-month loan at 8%, interest paid year-1: about $11,100. Capped at $10,000.

Is your income under the phase-out? Then $5,000 of interest saves you $5,000 times your tax rate. At a 22% rate, that’s $1,100. Is your income over $150,000 single, or $250,000 joint? Then you get nothing. This can mean real money over the life of the loan.

#For ETS-client business owners with mixed-use vehicles

Is your vehicle used for both business and personal driving? Then the analysis changes. The business-use portion stays the same: deduct interest as a business expense on Schedule C or 1120-S. That was already deductible before OBBBA, no change there. The personal-use portion is new: this interest can also be deductible, up to $10,000 a year, under the OBBBA rule. To qualify, you must expect to use the vehicle for personal driving more than half the time when you take out the loan. Do you also use the vehicle for business? Ask us how to split the interest. You cannot deduct the same interest twice.

Do you have an accountable plan that pays you back for personal vehicle use, as an S-corp owner? Check with your preparer. This deduction’s text does not cover that case directly.

#For ETS clients without auto loans

Did you buy with cash? Or do you carry a low-interest dealer-financing rate? Then the deduction may not matter much to you. Some new-car deals offer rates under 3%. At that rate, the yearly interest amount is often too small to matter.

#Common questions

Does the deduction apply to leased vehicles? Generally no. Lease payments include a financing piece, but a lease isn’t a traditional loan. The IRS has issued guidance on how leases are treated.

Does it apply if I refinance my auto loan? A refinanced loan may qualify. It has to meet the same rules: secured by the vehicle, used to buy a qualifying vehicle. The original purchase date still decides if the vehicle qualifies at all.

Can I deduct interest on a HELOC used to buy a car? No. The deduction requires the loan to be secured by the vehicle itself. HELOC interest follows separate rules. It’s typically not deductible unless used for home improvement, under post-TCJA law.

Does it apply to RVs, boats, or motorcycles? The qualifying-vehicle rule focuses on personal-use automobiles, light trucks, and SUVs. New motorcycles can qualify, if they meet the other rules. Boats and RVs are not on the list, so they do not qualify.

Is the deduction itemized or above-the-line? OBBBA has several worker-and-personal deductions. Tips, overtime, auto loan interest, and the senior deduction. All of them work above-the-line, on Schedule 1-A. That means you get them even with the standard deduction. No itemizing needed. The auto loan interest deduction specifically does not reduce AGI. It comes off income after AGI is figured.

What about the income phase-out? The deduction shrinks by $200 for every $1,000 your income is over $100,000 ($200,000 if you file jointly). It is gone at $150,000 for single filers and $250,000 for joint filers, when you use the full $10,000.

Will the deduction be extended beyond 2028? Like the overtime deduction, this one is temporary, through 2028. Whether it gets extended is a future question for Congress.

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Do you have a personal vehicle loan and want to make sure the deduction shows up on your 2025 return? The Tax Returns service handles it as part of standard prep. For planning ahead on a vehicle purchase and loan structure, the Discovery call is the right starting point.