Auto Loan Interest Deduction under OBBBA: What it Means for Lenders & Borrowers

The One, Big, Beautiful Bill Act (OBBBA, Public Law 119-21) was signed into law on July 4, 2025. It introduced sweeping changes to the federal tax code. Among its consumer-focused provisions is a new, temporary auto loan interest deduction (Sec. 70203) and an accompanying reporting obligation for lenders.(new IRC §6050AA). These measures, designed to provide tax relief to individuals purchasing new vehicles, will also impose compliance responsibilities on financial institutions. Understanding how the deduction works, which loans and vehicles qualify, and what lenders must do is essential for both borrowers and the businesses that finance them.

At a Glance

• Starting with the 2025 tax year, eligible taxpayers can deduct up to $10,000 of interest paid annually on qualifying new auto loans.
• Effective period: 2025-2028 TY
• Income limits: Phases out at $100,000 MAGI (single) and $200,000 (married filing jointly).
• Claim method: Available whether you itemize or take the standard deduction.
• Vehicle eligibility: Passenger vehicles under 14,000 lbs & applies only for personal use.

What is the Car Loan Interest Tax Deduction under OBBBA?

Buying a new car is a big purchase for most, so it’s no surprise that many take out a loan to help pay for their new rides. The Car Loan Interest Tax Deduction under OBBBA allows any eligible taxpayer to deduct up to $10,000 in interest paid, beginning in the 2025 tax year. The deduction applies to qualifying vehicle loans (new vehicle) purchased from January 1, 2025, to December 31, 2028 and is available whether the taxpayer itemizes deductions or takes the standard deduction. However, it is valid only for the vehicles that meet certain specific criteria. To prevent the benefit from being overly concentrated among higher-income households, the law phases out eligibility starting at $100,000 in modified adjusted gross income (MAGI) for single filers and $200,000 for joint filers.

The Deduction for Borrowers

Not every loan qualifies. The loan must begin after December 31, 2024, and it must be secured by the vehicle itself. Refinanced loans may remain eligible if they meet the criteria, and borrowers will need to provide the vehicle’s identification number (VIN) on their tax return to substantiate the claim. The law also imposes restrictions on the types of vehicles that qualify.

Auto Loan Deduction Criteria

• Effective period: Tax years 2025 through 2028.
• Income limits: Deduction phases out at $100,000 MAGI (single) and $200,000 (married filing jointly).
• Claim method: Available whether you itemize or take the standard deduction.
• Personal use only: Applies only to vehicles for personal use; business and leased vehicles do not qualify.

Loan eligibility:

• Loan must start after December 31, 2024.
• It must be secured by a lien on the vehicle (refinanced qualifying loans generally remain eligible)
• Borrowers must provide the Vehicle Identification Number (VIN) on their tax return.
• It is valid for personal use only (no business/commercial use).

Vehicle eligibility:

• Passenger vehicles under 14,000 lbs. (eg. cars, SUVs, pickups, motorcycles, minivans).
• The final assembly must occur in the United States.
• Used vehicles don’t qualify. Therefore, the vehicle must be new and for original use by the taxpayer only.

Note: Leased and business vehicles are not eligible for the auto loan deduction.

New Reporting Rules for Lenders

The OBBBA also introduces a new reporting mechanism for lenders, modeled on the familiar Form 1098 for mortgage interest. Lenders will be required to issue statements and file with the IRS when they receive $600 or more in annual interest from a borrower. The reporting requirement applies to loans originated after December 31, 2024, and the first borrower statements, covering 2025 interest, will be due by January 31, 2026. Although the IRS has not yet released the official form under IRC §6050AA, financial institutions should begin preparing systems to track interest and collect the required data. It is possible that the IRS will grant transition relief to ease implementation, but lenders should not delay their planning.

Practical Steps

For lenders, compliance will mean identifying all qualifying loans made in 2025 and later, tracking annual interest payments, and preparing to issue accurate borrower statements in early 2026. For borrowers, the new deduction can significantly reduce the cost of financing a vehicle, but only if they meet the detailed eligibility requirements.

For Lenders:

• Flag loans issued after December 31, 2024.
• Track interest payments by borrower.
• Prepare to issue borrower statements and file IRS returns beginning in 2026.
• Monitor IRS updates on the new form and filing process.

For Borrowers:

• Keep year-end lender statements and loan documents.
• Retain purchase records and a VIN label or dealer documentation confirming U.S. assembly.
• Verify that your loan and vehicle meet OBBBA’s eligibility criteria before claiming the deduction.

Bottom Line

The auto loan interest deduction under OBBBA provides meaningful tax relief for taxpayers financing new vehicles while simultaneously creating a new compliance regime for lenders. Borrowers should proactively maintain documentation (lender statement, purchasing & financing documents), and lenders should update their systems and procedures now. With the first reporting due in early 2026, preparation throughout 2025 will be critical to ensuring both taxpayers and lenders take full advantage of and comply with this new law.

Although the IRS has not yet released the official form under IRC §6050AA, financial institutions should begin preparing systems to track interest and collect the required data. It is possible that the IRS may grant transition relief to ease implementation, but lenders should not delay their planning.

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