Car Loan Interest Deduction

First, please note that Patriot is not a tax consultant or advisor, and everyone's situation will differ. For your needs, talk to your personal accredited tax consultant.

   Overview of the Car Loan Interest Deduction   

A key consumer-focused provision of the One Big Beautiful Bill (OBBB) is a new deduction for interest paid on certain car loans. This deduction applies to tax years 2025 through 2028 and is designed to support personal vehicle ownership by reducing the cost of financing.

The deduction allows eligible taxpayers to write off up to $10,000 in interest paid or accrued annually on a qualified car loan. Unlike typical interest deductions, this one doesn't require the taxpayer to itemize-it's classified as an "above-the-line" deduction, meaning it directly reduces taxable income for anyone who qualifies.

But the deduction isn't universal. It comes with specific requirements for both the buyer and the vehicle.

   Which Vehicles Qualify?   

Only new, U.S.-assembled passenger vehicles purchased for personal use are eligible. The law defines an "applicable passenger vehicle" with several specific criteria:

• The vehicle's original use must begin with the taxpayer-it must be new, not used or leased.

• It must be made for use on public roads, with at least two wheels.

• It must be classified as a car, minivan, SUV, pickup truck, van, or motorcycle.

• It must have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.

• It must undergo final assembly in the United States.

Final assembly is determined using the vehicle identification number (VIN). Specifically:

• The first character of the VIN shows country of origin. VINs starting with 1, 4, or 5 indicate U.S. assembly.

• The 11th character refers to the specific assembly plant, which can be decoded based on manufacturer records.

   Vehicles That Do Not Qualify  

The deduction is limited to individual buyers. The following are excluded:

• Fleet vehicles

• Commercial-use vehicles

• Leased vehicles

• Vehicles with salvage titles

• Vehicles bought for scrap or parts

   Income Limits and Phaseouts 

The deduction phases out for high-income taxpayers. The phaseout is based on Modified Adjusted Gross Income (MAGI) and applies as follows:

• For single, head of household, and married filing separately filers, the deduction begins to phase out at $100,000 MAGI and is fully phased out at $150,000.

• For married taxpayers filing jointly, the phaseout starts at $200,000 and ends at $250,000.

The deduction is reduced by $200 for every $1,000 that MAGI exceeds the lower threshold. Taxpayers with MAGI above the upper limit are not eligible.

   Why It Matters That the Deduction Is "Above the Line"  

Unlike many deductions that only benefit taxpayers who itemize, this one is considered above the line, which means:

• It reduces adjusted gross income (AGI) directly.

• It is available to any taxpayer who qualifies, regardless of whether they itemize deductions.

• It can indirectly influence eligibility for other tax benefits that depend on AGI.

This makes the deduction more widely accessible-particularly for middle-income buyers who typically take the standard deduction.