A new auto loan interest deduction applies to tax years 2025 to 2028 and allows you to deduct interest paid on a loan used to purchase a qualifying vehicle.
getty
The IRS has released new guidance to help businesses adapt to new auto loan interest reporting requirements under the One Big Beautiful Bill Act (OBBBA). The guidance is formalized in Notice 2025-57, which provides temporary relief and guidance for auto loan lenders and other interest beneficiaries required to file information returns with the IRS and provide statements to borrowers as the new rules take effect.
Transitional relief is available in 2025 to lenders required to file information returns with the IRS and provide statements to borrowers showing the total amount of interest they received on qualifying auto loans.
Reporting requirements for lenders
Businesses that receive $600 or more in auto loan interest from an individual in a year must follow new reporting requirements. Normally, these lenders must file information returns with the IRS and provide statements to borrowers showing how much interest was paid on licensed passenger vehicle loans.
For context, approximately 15.9 million new light vehicles (those under £10,000, including cars, SUVs and trucks) were sold in the US last year and many of them were financed directly by the dealership.
The IRS offers Transition Guidelines for Lenders
To help with the transition to the new reporting process, the guidance notes that the IRS will consider lenders to have met their reporting obligations in 2025 if they provide a statement to the buyer reporting the total amount of interest received. This information may be provided:
- In an easy to access web portal.
- In a regular monthly statement.
- In an annual statement sent to the borrower; or
- Through another reliable method that clearly shows the overall interest.
If lenders follow this guidance, the IRS will not impose penalties for failure to file information returns and provide payee statements in 2025.
Qualifying cars (and other vehicles) for the purposes of the discount
For purposes of the rebate, a qualified passenger vehicle is a car, minivan, van, SUV, truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the United States.
You can determine where a vehicle’s final assembly took place by checking the vehicle information label or using the vehicle identification number (VIN)—by law, every vehicle has a VIN displayed on a sticker or plate on the instrument panel. The 17-digit VIN has a unique combination of numbers and letters used to identify your vehicle. A VIN starting with 1, 4, or 5 usually indicates made in the US Cars made in Canada start with 2 and vehicles made in Mexico start with 3. Other countries are marked with letters—those made in Asia use letters J through R and those in Europe use letters S through Z.
(Note that parts often come from multiple countries and cars may then be produced in other countries, so double check before you buy to make sure the car qualifies.)
How can taxpayers report the car interest deduction
A reminder that the new car loan interest deduction applies to tax years 2025 to 2028 and allows you to deduct interest paid on a loan used to purchase a qualifying vehicle. It can be claimed regardless of whether you itemize your bookings.
To qualify for the discount, interest must be paid on a loan originated after December 31, 2024, for the purchase of a vehicle (lease vehicles do not qualify). The original use of the vehicle must be initiated by you (used vehicles do not qualify). The deduction applies to interest paid on a personal vehicle loan (not for business or commercial use) and must be secured by a lien on the vehicle.
A certified vehicle is a car, minivan, truck, SUV, truck, or motorcycle with a gross vehicle weight of less than 14,000 pounds that has undergone final assembly in the United States. If a paid-off vehicle loan is later refinanced, the interest paid on the refinanced amount is generally eligible for the deduction.
To claim interest, you must quote your Vehicle Identification Number (VIN). After you add interest (you can claim more than one vehicle), your temporary deductible is that amount or $10,000 (the maximum deductible), whichever is less. As before, there is one more step — considering the phase-out. Phasing out means that the tax benefit decreases as your income increases. In this case, the deduction is phased out with modified adjusted gross income over $100,000 ($200,000 for joint filers).
See how the calculation works. Let’s say you have $8,000 in car loan interest and your MAGI—that number you calculated on line 3 in Part I—is $350,000 as a joint filer.
- Calculate the excess MAGI over the phase-out limit ($350,000 − $200,000 = $150,000)
- Calculate how much of the reservation is lost due to the phasing out. The phase-out rate results in a $200 reduction in the withholding for every $1,000 your income exceeds the limit. So, figure the number of thousands over the limit ($150,000 / $1,000 = 150) and multiply it by $200 ($150 × $200 = $30,000).
- Calculate the allowable deduction. Your final step is to reduce the maximum withholding by the amount removed ($10,000 − $30,000 = less than zero).
In our example, you don’t qualify for the discount.
If you sign it, the withholding would be zero when MAGI for a joint file reaches $250,000. You reach phase-out much faster for this deduction than you do for tips or the overtime deduction—again, not exactly tax-free on car loan interest. All provisions are subject to limitations and phasing out.
What’s next for taxpayers?
The auto loan interest deduction is one of a series of new deductions under the OBBBA that are largely referred to in the schedule by their popular monikers: No Tax on Tips, No Tax on Overtime, No Tax on Auto Loan Interest, and No Tax on Social Security.
You will report the deduction along with these other OBBBA deductions on the new Schedule 1-A, Additional discounts, when you file your 2025 tax return in 2026. The final version of Schedule 1-A is not out yet, but you can take a look at the draft version here.
And there is more information on OBBBA, so check back Forbes. To make it easy, we recommend signing up for our free tax newsletter—that way, the information you need will be delivered to your email inbox every Saturday morning, with no extra work on your part.
