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New Deduction for Personal Vehicle Loan Interest Under the One Big Beautiful Bill Act: What Taxpayers Need to Know


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Background: The General Rule and the OBBBA Exception

Historically, the Internal Revenue Code (IRC §163(h)) has disallowed deductions for personal interest, including interest paid on car loans for personal vehicles. The OBBBA creates a notable exception for a limited period, allowing taxpayers to claim a deduction for interest paid on loans used to acquire a new, U.S.-assembled passenger vehicle for personal use.


Key Features of the New Deduction

  1. Eligibility and Scope

    • The deduction applies to interest paid or accrued on indebtedness incurred after December 31, 2024, and before January 1, 2029.

    • The loan must be used to purchase, and be secured by a first lien on, a new "applicable passenger vehicle" for personal use.

    • The deduction is available to all taxpayers, regardless of whether they itemize deductions, as it is treated as an "above-the-line" deduction.

  2. Definition of Qualified Passenger Vehicle

    • The vehicle must be new (original use commences with the taxpayer).

    • It must be manufactured primarily for use on public streets, roads, and highways, and have at least two wheels.

    • Eligible vehicle types include cars, minivans, vans, SUVs, pickup trucks, and motorcycles.

    • The vehicle must have a gross vehicle weight rating of less than 14,000 pounds and final assembly must occur in the United States.

    • Vehicles purchased for fleet sales, commercial use, lease financing, salvage, or scrap are not eligible.


  3. Dollar Limitation

    • Taxpayers may deduct up to $10,000 of qualified interest per year.


  4. Income Limitation and Phaseout

    • The deduction is reduced by $200 for each $1,000 (or portion thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint filers).

    • MAGI is defined as adjusted gross income increased by any amounts excluded under IRC §§911, 931, or 933.


  5. Refinancing

    • Interest on a refinanced loan is eligible for the deduction, but only to the extent the refinanced amount does not exceed the original principal.


  6. Reporting Requirements

    • Taxpayers must report the vehicle identification number (VIN) on their tax return for each year the deduction is claimed.

    • Lenders are required to file information returns with the IRS and provide statements to borrowers showing the total interest received during the year.


  7. Ineligible Loans

    • The deduction does not apply to loans for fleet sales, commercial vehicles not used for personal purposes, lease financing, vehicles with a salvage title or intended for scrap/parts, or loans from related parties.

Practical Considerations for Taxpayers


  • The deduction is available for loans used to purchase new, U.S.-assembled vehicles only. Used vehicles, leased vehicles, and vehicles assembled outside the United States do not qualify.

  • Taxpayers should ensure that the loan is secured by a first lien on the vehicle and that the vehicle meets all eligibility criteria.

  • The deduction is subject to a strict dollar cap and phases out for higher-income taxpayers, so careful planning is advised.

  • Proper documentation, including the VIN and lender-provided interest statements, will be essential for claiming the deduction.


Conclusion

The OBBBA’s new deduction for personal vehicle loan interest offers a unique, time-limited opportunity for taxpayers to reduce their taxable income when purchasing a new personal vehicle. With the deduction available for tax years 2025 through 2028, individuals considering a new vehicle purchase should evaluate whether they can benefit from this provision. As always, consulting with a tax professional is recommended to ensure compliance with all requirements and to maximize the available tax benefits.


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