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The “One Big Beautiful Bill” Act (officially Public Law 119‑21) was signed into law on July 4, 2025. One of its new provisions allows individuals to deduct interest paid on certain car loans. This deduction is effective for tax years 2025 through 2028, meaning it starts January 1, 2025, and ends December 31, 2028.
Under the law, taxpayers may take an above-the-line deduction of up to $10,000 per year for interest paid on a loan used to buy a qualifying passenger vehicle for personal use. This means the deduction is available even if you claim the standard deduction and do not itemize.
To qualify, the vehicle must meet specific criteria:
• The loan must originate after December 31, 2024.
• The vehicle must be new, meaning its original use must begin with the taxpayer—used vehicles do not qualify.
• It must be for personal, non-business use.
• A lien must secure the vehicle.
• The vehicle must be assembled in the United States. Eligible types include cars, minivans, vans, SUVs, pickup trucks, and motorcycles, with a gross vehicle weight under 14,000 pounds.
The deduction phases out for individuals with modified adjusted gross income (MAGI) over $100,000, and for joint filers over $200,000. Higher-income taxpayers will see a reduced deduction.
If you refinance a qualifying vehicle loan, interest on the refinanced portion generally remains eligible for the deduction.
From a practical standpoint, this can offer real savings—especially for those paying significant interest. For example, a $40,000 car loan at a 5 percent interest rate would cost about $2,000 in interest during its first year; taking the deduction could lower your taxable income by that amount. While few taxpayers will reach the full $10,000 cap—due to the average car price—the deduction can still provide meaningful relief.
To claim the deduction, it’s important to confirm eligibility:
• Check the vehicle’s Monroney sticker or use the VIN to verify if final assembly occurred in the U.S.
• Keep documentation of the loan’s origination date, interest paid, and proof of lien.
• Watch for IRS forms and guidance—banks or credit unions may need to report interest for qualifying loans.
The law’s temporary nature makes timing critical. The provision is available only through the end of 2028, so auto buyers looking to benefit may wish to plan accordingly.
In sum, the One Big Beautiful Bill creates a new, temporary tax break for personal car buyers: up to $10,000 of loan interest can now be deducted each year from 2025 to 2028—so long as the loan and vehicle meet eligibility requirements. It’s a simple, above-the-line deduction that offers modest but welcome savings during the life of the provision.
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