You can deduct mortgage interest on a home you buy within generous limits, but you can’t deduct the interest on a loan for what is probably your second biggest purchase: Your car or other vehicle. Until now.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
The One Big Beautiful Bill Act (OBBBA) authorizes a new tax deduction for auto loan interest, beginning in 2025 and ending after 2028. But this tax break is more limited than the mortgage interest deduction and is phased out for certain taxpayers. Nevertheless, car buyers may get an extra boost when they file their personal 2025 tax returns.
Starting point: The tax law treats different types of interest differently. Currently, mortgage interest paid on the first $750,000 of acquisition debt of a qualified residence is deductible if you itemize. Investment interest can be deducted up to the amount of your net investment income. Student loan interest is deductible up to a modest level of $2,500 a year. However, you get zero tax benefit from interest on personal debt such as most credit card debt.
Previously, interest paid on an auto loan was treated as nondeductible personal interest. But the OBBBA approves an annual deduction of up to $10,000 for auto loan interest, beginning in 2025 and lasting through 2028. Because most car buyers will pay less than $10,000 a year in auto loan interest, they likely will be able to deduct the full amount of their interest payments in the early years of the loan term.
To qualify for this tax break, the vehicle must meet the following requirements.
- It is a new vehicle purchased with a loan on or after January 1, 2025.
- It has been assembled in the U.S.
- It is a car, minivan, SUV, pickup truck or motorcycle.
- It weighs less than 14,000 pounds.
- It is used personally. It can’t be a business vehicle.
This deduction is available whether you itemize or not. The catch: The amount of the deduction is phased out for moderate-to-high income taxpayers.
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The new deduction begins to phase out at $100,000 of modified adjusted gross income (MAGI) for single filers and $200,000 of MAGI for joint filers. It is reduced by $200 for every $1,000 above the threshold.
As a result, taxpayers of all stripes may receive little or no benefit from the new deduction. For instance, a single filer in the 10% tax bracket who pays $1,000 in interest annually can deduct only $100. A joint filer with MAGI above $250,000 can’t deduct any interest.
Finally, this tax break is available only for new vehicles. Used vehicles don’t qualify. Leased cars don’t qualify either.
In contrast to the new auto interest deduction, the OBBBA is repealing the tax credit for electric vehicles (EVs) purchased after September 30, 2025. The tax law previously allowed a credit of up to $7,500 of the cost of a new EV or $4,000 for a used one. Unique opportunity: If you beat the September 30 deadline, you may be eligible for both an EV credit and the auto loan interest deduction in 2025.
Finish line: Remember that the new deduction expires after 2028, although Congress might extend it. Meet with your clients to ensure they qualify for the maximum available tax benefits the dealer hands over the keys.
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