The One Big Beautiful Bill Act (OBBBA) created a temporary auto loan interest deduction that may allow eligible taxpayers to deduct interest paid on certain vehicle loans. The deduction is available whether you claim the standard deduction or itemize. However, qualifying rules, income limitations, and vehicle requirements can make eligibility more complicated than many taxpayers realize.

Basics Of The Deduction

The new deduction was created by the One Big Beautiful Bill Act (OBBBA). You don’t have to itemize deductions to claim it — it’s available both to nonitemizers who claim the standard deduction and to itemizers.

The OBBBA defines qualified passenger vehicle loan interest as interest paid or accrued during the tax year on debt incurred by a taxpayer after December 31, 2024, for the purchase of a qualifying vehicle for personal use. The debt must be secured by a “first lien,” meaning the lender generally has priority over other creditors’ claims to the vehicle until the loan is paid off.

Under the OBBBA, a qualifying vehicle must be a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. The original use of the vehicle must begin with the taxpayer; leased or used vehicles don’t qualify.

The deduction is also limited to vehicles assembled in the United States, as determined by the final assembly location. Remember that not every vehicle sold by an American manufacturer necessarily has its final assembly in this country. Conversely, some “foreign” vehicles may have their final assembly in the United States.

Dollar & Income-Based Limits

The deduction is generally limited to $10,000 per year. If the deduction is a primary motivator in purchasing a new vehicle, keep in mind that most taxpayers won’t qualify for the full $10,000.

For example, assume you purchase a new vehicle before year end and finance $50,000 of the price at a 6.5% interest rate for five years. The total interest over that time will be approximately $8,700. But your deduction for each eligible tax year would be limited to qualifying interest paid that year. Also, the deduction is available only through 2028, unless lawmakers extend it. So, your annual deduction would be only a fraction of the total $8,700 of interest. And you’d be able to deduct the total amount only if the tax break is extended beyond 2028.

Your annual deduction could be further reduced based on your income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000, or $200,000 for married couples filing jointly. The otherwise allowable deduction is reduced by $200 for every $1,000 — or fraction of $1,000 — of MAGI above those thresholds.

Once MAGI reaches $150,000 or $250,000, respectively, the deduction isn’t available. Depending on how much qualifying interest you pay, your deduction could be fully phased out at a MAGI that’s substantially less than $150,000 (or $250,000 if you’re a joint filer).

Finally, keep in mind that deductions reduce your taxable income, not your taxes dollar-for-dollar. So, your tax savings will be only a portion of the amount deducted.

The Final Regulations

Like the proposed regulations, the final regulations address a range of issues related to the deduction. The following may be the most notable if you might be eligible for it:

Qualifying Debt

The proposed regulations specified that debt qualified only to the extent incurred for a qualifying vehicle purchase. It also qualified for other items or amounts directly related to the purchase and “customarily financed” in the same transaction, including vehicle service plans, extended warranties, sales taxes, and vehicle-related fees.

In response to comments received on the proposed regulations, the final regulations identify additional examples of costs that can be included in a qualifying vehicle loan:

• Guaranteed asset protection coverage
• Credit insurance products
• Repair plans
• Vehicle protection products
• Key fob replacement plans
• Certain vehicle accessories

 
The final regulations make clear that whether items or amounts are customarily financed in a qualifying vehicle purchase transaction and are directly related to the purchase of the vehicle is determined on an industry-wide basis and not by reference to the financing terms of a particular lender. Interest on credit card debt related to a vehicle purchase, however, generally doesn’t qualify because the debt usually isn’t secured by the vehicle.

Negative Equity

So-called negative equity occurs when you trade in a vehicle that still has debt exceeding that vehicle’s value and you roll that excess debt into the financing for a qualifying new vehicle. The proposed regulations would have excluded this amount from qualifying debt. Industry commenters cited the administrative burden of tracking the separate loan components when requesting that the entire loan count for purposes of the deduction.

The IRS was unmoved, though. Interest attributable to the negative-equity portion of the loan doesn’t qualify for this deduction under the OBBBA. The final regulations retain the requirement to allocate interest and principal payments proportionately between qualifying and nonqualifying debt. But any down payment is applied first against negative equity and any other amounts that aren’t incurred for the purchase of the vehicle or directly related to the purchase and customarily financed in such a transaction.

Original Use & Personal Use

The final regulations recognize that some states require dealers to title or register demonstrator vehicles. Under the proposed regulations, this could have resulted in the original use commencing with the dealer and not a subsequent purchaser. The final regulations therefore provide that the original use of a vehicle held by a dealer won’t commence with the dealer if the vehicle is held primarily for sale to customers. But original use of a vehicle begins with a purchaser only if the loan documentation treats the vehicle as a new vehicle.

The final regulations retain the proposed regulation’s provision establishing that the personal use requirement applies only when you incur the debt. At that time, you must expect that you, your spouse, or certain relatives will use the vehicle for personal purposes more than 50% of the time over your anticipated ownership period. But if it turns out the actual use varies from the expected use at the time you incur the debt, it won’t change the personal use determination.

Cover Your Bases

Taxpayers hoping to take advantage of this temporary deduction, especially for 2026, should tread carefully. A single misstep in vehicle choice, documentation requirements, or another area could cost you. For example, you must include the vehicle identification number (VIN) on your return for each year you claim the deduction. Contact us to discuss whether you qualify for the deduction and, if so, how to make the most of its benefits.