New Car Loan Interest Deduction Explained for Taxpayers
A New Tax Break for Car Loan Interest
Congress has created a brand new tax deduction for personal car loan interest as part of the One Big Beautiful Bill Act, signed into law on July 4, 2025. This deduction did not previously exist under federal tax law. The IRS proposed regulations known as REG 113515 25 explain how the new law passed by Congress will be administered and enforced.
Historically, interest paid on personal car loans was always considered nondeductible personal interest. OBBBA reverses that long standing rule by allowing certain taxpayers to deduct up to $10,000 per year of qualifying car loan interest before calculating adjusted gross income.
Who Can Claim the Deduction
Only individual taxpayers may claim this deduction. Taxpayers filing as married filing separately are not eligible. Eligibility is also limited by income, using modified adjusted gross income.
- Single filers: The deduction begins to phase out when modified adjusted gross income exceeds $75,000 and is fully phased out at $100,000.
- Married filing jointly: The deduction begins to phase out when modified adjusted gross income exceeds $150,000 and is fully phased out at $200,000.
If income falls within the phase out range, only a portion of the interest may be deductible.
Vehicle Requirements
Not every vehicle qualifies. The deduction applies only to loans used to purchase a qualified passenger vehicle.
- The vehicle must be a passenger vehicle intended for personal use.
- The vehicle must be newly acquired by the taxpayer.
- The vehicle must be used primarily for personal purposes.
- Trucks, vans, and similar vehicles qualify only if they meet the passenger vehicle definition under the law.
Loan and Debt Requirements
The loan itself must also meet specific requirements.
- The debt must be incurred to purchase the vehicle.
- The loan must be secured by the vehicle.
- The loan must be incurred after December 31, 2024.
- Refinanced debt generally does not qualify.
If a vehicle is used partly for business, only the personal use portion of the interest may qualify for this deduction. Business related interest continues to follow existing business tax rules.
How the Deduction Works
Eligible taxpayers may deduct up to $10,000 of qualifying car loan interest per year. Because this deduction is taken before adjusted gross income is calculated, it can reduce taxable income even for taxpayers who do not itemize deductions.
Taxpayers should retain loan statements and records that show the purchase of the vehicle, the amount of interest paid, and how the vehicle is used.
New IRS Reporting by Lenders
Lenders will now be required to report qualifying car loan interest to both the taxpayer and the IRS when total interest paid during the year is $600 or more. This reporting system is designed to support accurate claims of the deduction and mirrors existing reporting for mortgage and student loan interest.
What Happens Next
These rules are currently proposed, and the IRS is accepting public comments. A public hearing is scheduled for February 24, 2026. While final details may change, the deduction itself is already law.
For taxpayers considering a vehicle purchase or reviewing an existing loan, this new deduction can materially affect overall tax liability. Understanding income limits, vehicle qualifications, and loan requirements is essential.
