Among the many new tax provisions included in the One Big Beautiful Bill Act (OBBBA) was the “no tax on car loan interest,” which is a new, temporary exception for deducting personal interest expenses. This new tax benefit allows certain taxpayers to deduct interest paid on a qualified passenger vehicle loan during a taxable year, beginning after Dec. 31, 2024, and before Jan. 1, 2029. 

However, not every taxpayer is eligible for this deduction, and the IRS has issued some transition relief for 2025 for businesses reporting car loan interest under the OBBBA. 

Learn more about the rules related to qualified passenger vehicle loan interest and the reporting guidelines lenders should keep in mind.

Understanding the “No Tax” Rule 

The OBBBA allows eligible individuals — including those who don’t itemize — a temporary new deduction for some or all of the interest paid on some loans. The loans must be taken out to purchase a qualifying passenger vehicle. 

Specifically, for 2025 through 2028, up to $10,000 of car loan interest can potentially be deducted each year. The loan must be taken out after 2024 and must be a first lien secured by the vehicle, which is used for personal purposes. Leased vehicles don’t qualify. This may sound good, but not all buyers will qualify for the new deduction because of these limitations and restrictions: 

• Income-based phaseout rule. The deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married joint-filing couples. If your MAGI is above the applicable threshold, the amount that you can deduct (subject to the $10,000 limit) is reduced by $200 for each $1,000 of excess MAGI. So, for an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000. For married joint filers, the deduction is completely phased out when MAGI reaches $250,000.
• Qualifying vehicles. To qualify for the deduction, all the criteria below must be met:
  • The vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds.
  • It must be manufactured primarily for use on public streets, roads and highways, and it must be new (meaning the original use begins with you).
  • The “final assembly” of the vehicle must occur in the United States.
  • Taxpayers must report the vehicle identification number (VIN) on their tax return. Vehicles assembled in America have a special number in the VIN to signify that.
  • The car loan lender must file an information return with the IRS that shows the amount of interest paid during the year on your qualified car loan.
• Refinanced loans. If an original qualified car loan is refinanced, the new loan will be a qualified loan as long as: 1) the new loan is secured by a first lien on the eligible vehicle and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.
• Ineligible loans. Interest on the following types of loans doesn’t qualify for the new deduction:
• Loans to finance fleet sales.
• Loans to buy a vehicle not used for personal purposes.
• Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts.
• Loans from certain related parties.
• Any lease financing. 

Transition Relief for 2025

The Department of Treasury and the IRS have released transitional relief for 2025 for lenders and other interest recipients who are required to file information returns with the IRS and provide statements to borrowers showing the total amount of interest received on qualified passenger vehicle loans and other information related to the loan.

Under today’s guidance, the IRS will consider that lenders have met their reporting obligations for interest received on a qualified passenger car loan in 2025, if they make a statement available to the buyer indicating the total amount of interest received. Specifically, lenders can meet their reporting requirements by making this total amount of interest available:

• On an online portal that the buyer can easily access.
• In a regular monthly statement.
• On an annual statement that is provided to the buyer.
• By other similar means designed to provide accurate information to the buyer regarding interest received.

In addition, the IRS will not impose penalties on lenders for failure to file information returns and provide payee statements if they satisfy their reporting obligations as described in the guidance.

Stay Tuned 

Although the new deduction is an attractive tax benefit, it’s not one that many car buyers will be eligible for, as it is off limits for high-income purchasers, used vehicle buyers and those who buy foreign imports. Businesses required to file returns or provide statements to borrowers are encouraged to create the appropriate internal processes to ensure they meet filing obligations. Whether you’re an individual looking to take advantage of this deduction or a business seeking assistance with reporting requirements, we have a pro for you. Contact us today to obtain assistance.