For years, the tax code has trended toward reducing the amount of interest that may be deducted on your tax return. Until recently, it allowed interest deductions only as an itemized deduction for qualified residences and vacation property. That is changing now with the passage of the One Big Beautiful Bill Act (OBBBA) and the introduction of a new car interest tax break. Here is what you need to know.

OBBBA Deduction

Congress and the Executive Office traditionally use tax breaks on interest to drive consumer behavior. The government has historically encouraged us to own homes, and now it 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.

What qualifies for the new car interest tax break

• 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, minivans, SUVs, trucks, and motorcycles
• Maximum interest deduction: $10,000
• Income phaseout: Single $100,000 – $150,000; Married filing jointly $200,000 – $250,000
• Deduction is above the line (you do not need to itemize your deductions to receive this benefit)

Tips to maximize the car interest deduction

1. All your interest is probably deductible. $10,000 interest results in a vehicle purchase over $100,000, according to many economists, but the average loan on a vehicle is in the $40,000s. So if you qualify, the benefit covers all the interest you pay.
2. Make the loan five years or fewer. The deduction is currently scheduled to remain in place for four years, so interest after that is probably not covered.
3. What qualifies is tricky. Some U.S. brands are assembled abroad, while some foreign vehicles are assembled here. So, get confirmation before you buy.
4. 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.
5. Deduction is not elimination. Your interest expense still exists! There is a 20-25% reduction. So do not overspend your income on 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 to buy a new car anyway, ask the dealer whether it qualifies for this program. But for most taxpayers, it probably isn’t worth making this the only thing steering their purchase decision. Contact our RRBB advisors if you have any questions or for more information.