A big tax shift for car buyers: auto loan interest deduction

You’ve likely heard about the new OBBBA deduction, which allows individuals to deduct interest paid on eligible auto loans. It’s not just a consumer topic; it’s a client advisory opportunity and a compliance challenge, too. The Internal Revenue Service released official guidance in Notice 2025-57 outlining “transition relief” for tax year 2025, during which time new lender reporting rules are being developed. What do tax pros need to watch for, and how can you use it as a planning conversation starter?

New OBBBA vehicle loan interest deduction

Beginning tax year 2025 and running through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle used for personal use. The annual deduction limit is $10,000. The vehicle must be a new car, minivan, van, SUV, pickup truck or motorcycle assembled in the United States, with a gross vehicle weight rating of less than 14,000 pounds. Even better for most clients, the deduction is available regardless of whether they itemize.

Is there an income threshold?

As with many tax breaks, higher-income taxpayers may see reduced benefits. The deduction begins phasing out when modified adjusted gross income (MAGI) exceeds $100,000 for single filers or $200,000 for joint filers. For every $1,000 of MAGI above those thresholds, the allowable deduction is reduced by $200 until it phases out completely (around $150,000 for single filers and $250,000 for joint filers).

Additional vehicle requirements 

To qualify, the loan must be incurred after Dec. 31, 2024, and the vehicle must be brand new and used only for personal purposes. Leased or business-use vehicles and used cars do not qualify. The vehicle must be assembled in the U.S., so its make alone does not guarantee eligibility. Cars assembled abroad will not qualify, and buyers may need to confirm origin with the manufacturer to determine eligibility. In addition, the loan must hold first lien position, be secured by the vehicle and be in its first lien position, although refinanced loans may qualify if they meet certain criteria.

How will lenders report vehicle loan interest?

One of the biggest operational issues will be lender and borrower information reporting. For tax years after 2025, the IRS expects lenders who receive $600 or more in interest on qualifying vehicle loans to file information returns and provide statements to borrowers. However, in Notice 2025-57, the IRS offers transition relief for tax year 2025. Lenders and payors will have additional time to adjust information-reporting systems while taxpayers claim the deduction. Lenders are obligated to provide information on the interest consumers have paid, using one of the following methods:

• Accessible online buyer portal
• Regular monthly statement showing accrued interest 
• Annual interest statement furnished to the customer 
• Any other similar means utilized to provide accurate interest information 

After 2025, lenders will be required to report interest received on Form 1098-VLI, Vehicle Loan Interest Statement, Box 1. A draft version of Form 1098-VLI is available for review on the IRS website. 

Make a checklist for your clients

To help clients take full advantage, start with a simple checklist. 

• Verify that the vehicle is new, assembled in the U.S. and personally owned
• Confirm that the loan is eligible, originated after 2024 and secured by the vehicle 
• Gather documentation showing total interest paid and keep purchase paperwork 
• Clients should retain the vehicle identification number (VIN) label and assembly plant details in case proof is required

If a client’s income is near the threshold, consider timing vehicle purchases or managing taxable income to remain deduction eligible. You can also prepare a standard communication template or use this NATP newsletter to remind clients: If you’re buying a new car in 2025, there’s a new tax rule that may lower your tax bill next year.

Watch how this deduction interacts with other credits and deductions. For instance, clients purchasing electric vehicles or hybrid models acquired on or before Sept. 30, 2025, may be eligible for clean vehicle credits in addition to this interest deduction. Coordinating the two benefits will require careful documentation.

Why this new deduction matters for tax pros

First, it’s a perfect client advisory moment. Many clients buy vehicles every few years. If you bring up the new deduction before tax season, you demonstrate forward-looking expertise. 

Second, it demands compliance readiness. Documentation of vehicle eligibility, interest paid, loan origination date and lien status will be essential. 

Third, it introduces income-sensitive planning opportunities for those near phaseout limits. Fourth, it highlights potential differences in how states may conform, so practitioners should be aware of any state-specific rules. 

Finally, it offers a limited-time benefit. Because the deduction expires after 2028, clients who act sooner could enjoy multiple years of tax savings.

What’s next for tax pros

The deduction for personal vehicle loan interest is a rare and notable change in tax policy. It revives a type of deduction that hasn’t existed for personal-use debt since the 1980s.

As new provisions like this roll out, NATP is here to help you stay informed and confident. From in-depth CPE courses to practical webinars, NATP provides the tools you need to understand evolving legislation, such as OBBBA, and guide your clients effectively.