Background: Prior to the enactment of the One Big Beautiful Bill Act, interest paid on loans for personal vehicles was disallowed. Interest that was deductible on an individual’s tax return was limited to: mortgage interest, investment interest, and student loan interest.

Is your vehicle eligible for a deduction?

The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, created a new provision allowing for a maximum annual deduction up to $10,000 per year in interest paid on loans to purchase new vehicles for personal use. The provision was designed to provide tax relief to Americans looking to purchase a new vehicle, encouraging stimulation to the domestic automobile industry while vehicle prices and interest rates are elevated. This provision is effective for tax years 2025 through 2028.

• Qualifications
  • Loan
    • The loan used to purchase a new vehicle must originate after December 31, 2024.
    • Original use of the vehicle must start with you, the taxpayer.
  • Vehicle
    • Have a gross vehicle weight rating under 14,000 pounds (i.e., car, minivan, SUV, pickup truck, van)
    • New motorcycles are also eligible
    • Final assembly takes place in the United States – verified by vehicle identification number (VIN)
    • For personal use only
    • Used vehicles do not qualify
• Deduction Limits and Phase-Outs
  • Limited to $10,000 of interest paid per taxpayer per year
  • Deduction begins phasing out when the taxpayer’s modified adjusted gross income (MAGI) exceeds $200,000 for married filing jointly filers ($100,000 for other filers).
• Refinancing
  • If a qualified loan is refinanced, interest paid on the refinanced amount remains eligible for the deduction, but only up to the original principal amount.
  • Lenders must file information returns with the IRS and provide statements to taxpayers stating the total interest paid during the year. Transition relief will be provided in 2025 as reporting requirements are implemented to the recipients of the interest payments.

Example:

A married filing jointly taxpayer purchases a new vehicle January 1, 2026. The vehicle is assembled in the United States, as confirmed by the VIN. The vehicle was financed for $65,000 at 7.5% interest. Total annual interest paid on the new vehicle for 2026 is $4,875. modified adjusted gross income (MAGI) is $205,000.

The deduction phase-out is calculated at a $200 reduction for every $1,000 of MAGI more than the married filing jointly threshold ($200,000). Total deduction is therefore reduced by $1,000 (5 x $200). Total deduction eligible to be taken on the tax return is $3,875.

Planning Considerations

• High-income taxpayers should be aware of the phase-out rules and plan accordingly, as the benefit of the new deduction may be limited or nonexistent.
• Available whether a taxpayer itemizes or takes the standard deduction.
• Documentation is important. Be sure to maintain records of loan statements, interest statements, and vehicle documentation. The VIN is required to be reported on the tax return as well.
• Watch for state’s conformity or disconnects to federal taxable income. For example, Oregon has a rolling reconnect policy, making Oregon tie to the definition of federal taxable income.

If you’d like to learn more, please reach out to Tommy Giovanni or anyone on the team at info@gmco.com.