For years, the tax code trend was to reduce the amount of interest that may be deducted on your tax return. Until recently, it really only allowed interest deductions as an itemized deduction on qualified residences and vacation property. That is changing now with the passage of the OBBB Act and the introduction of a new car interest tax break. Here is what you need to know.
Background
Congress and the Executive office traditionally use tax breaks on interest to drive consumer behavior. The government historically likes us to own homes and now the government is encouraging us to buy new vehicles with final assembly in the United States. It is an attempt to encourage manufacturers to migrate assembly back to the U.S.
Details of what qualifies
- New not used vehicles
- Personal use; not business use
- Final vehicle assembly in the United States
- Purchases after 2024 and before 2029
- Vehicles under 14,000 pounds qualify, including cars, mini-vans, SUVs, trucks, and motorcycles
- Maximum interest deduction: $10,000.
- Income phaseout: Single $100,000 -150,000; MFJ $200,000 – $250,000
- Deduction is ABOVE the line. You do not need to itemize your deductions to receive this benefit.
Observations and tips
- All your interest is probably deductible. $10,000 interest results in a vehicle purchase over $100,000 per many economists, but the average loan on a vehicle is in the $40,000s. So if you qualify, ALL the interest you pay is covered within the benefit.
- Make the loan 5 years or less. The deduction is current scheduled to be in place for 4 years, so interest after this is probably not covered.
- What qualifies is tricky. Some U.S. brands are assembled abroad, while some foreign vehicles are assembled here. So get confirmation BEFORE you buy.
- Reporting is key. In 2025 the IRS recently gave reporting relief to lenders, so you will not receive a year end tax report. You should, however, receive a recap of interest paid to the lender in the form of a recap or monthly statements.
- Deduction is not elimination. Your interest expense still exists! It is just reduced by 20 to 25%. So do not overspend your income with a large car loan because of this tax law change. In fact, buying a used car may still be financially better for you.
It is easy to get carried away with new tax law changes like this one. The best tip? If you were planning on buying a new car anyway, ask the dealer if it qualifies for this program. But for most taxpayers, it is probably not worth having this being the only thing steering your purchase decision.