The “One Big Beautiful Bill” (OBBB), signed into law on July 4, 2025, represents the most sweeping tax reform since the Tax Cuts and Jobs Act (TCJA). While this legislation spans hundreds of pages, individual taxpayers need to be aware of key changes regarding interest on car loans that will impact them.

Background Discussion

Historically, individual taxpayers that do not own a business were not allowed to deduct interest on car loans. For most individuals this means the only interest that was deductible was mortgage interest on a qualified residence.

Summary of OBBB Changes

The OBBB created a new deduction for car loan interest for individual taxpayers, effective for tax years beginning in 2025 through 2028. It is important to note that unlike many other OBBB provisions, this deduction is not permanent and will expire after 2028 unless the law is extended. The deduction for car loan interest is capped at $10,000 and can be claimed even if the taxpayer does not meet the threshold for itemizing their deductions. The deduction begins to phase out with a taxpayer’s modified adjusted gross income exceeds $100K ($200K for married taxpayers filing jointly), so higher-income taxpayers may see a reduction or elimination of the deduction.

The deduction is also subject to several requirements. Specifically, the car loan interest must be for a loan incurred after December 31, 2024, secured by a first lien on an “applicable passenger vehicle” for personal use.

An “applicable passenger vehicle” is new vehicle (i.e., used cars are not eligible) which has a gross vehicle weight of less than 14,000 pounds. Final assembly of the vehicle must occur in the United States. Taxpayers also need to disclose the VIN of the vehicle on their tax return.

Taxpayers and tax preparers should take note of the following items:

• While this deduction will likely benefit many taxpayers, not everyone will qualify – particularly taxpayers who exceed the income limitations or purchase used or foreign cars.

• The OBBB also requires lenders to provide report car loan interest paid (if $600 or more in a tax year). Taxpayers can likely expect to receive a new type of Form 1098 from their lender reporting this interest.

Contact your YHB advisor today to discuss how these changes can impact you.