Focus: Interest on Car Loans Deduction
On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”). OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.
With the passing of OBBBA, a new temporary deduction for car loan interest for individual taxpayers has been introduced. Effective for tax years beginning after December 31, 2024, and before January 1, 2029, interest paid on a qualifying car loan can be deductible.
Prior Law:
For noncorporate taxpayers, no deduction is allowed for “personal interest”.
Personal interest is any interest that is not:
(1) qualified residence interest;
(2) investment interest;
(3) interest on debt allocable to a trade or business, other than the trade or business of being an employee;
(4) interest taken into account in computing passive activity income or loss;
(5) interest on deferred estate tax payments; or
(6) interest allowable as a deduction under IRC Sec. 221, relating to interest on educational loans.
Thus, for example, nondeductible personal interest includes interest on car loans (unless the car is used for business) and finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses.
Current law – OBBBA Car Loan Interest Deduction:
Taxpayers can deduct up to $10,000 of interest paid on car loans per tax year. The deduction begins to phase out and is reduced by $200 for each $1,000 of a taxpayer’s modified adjusted gross income (MAGI) of $100,000 for single filers and $200,000 for married filers. It is fully phased out at $150,000 MAGI for single filers and $250,000 for joint filers. Taxpayers can claim this deduction even if they do not itemize on Schedule A.
What Qualifies as Deductible Car Loan Interest?
A qualifying passenger vehicle interest paid or accrued during the tax year applies to indebtedness that:
- Is incurred by the taxpayer after December 31, 2024.
- Is for the purchase of a passenger vehicle for personal use.
- Is not owed to a related party.
What type of vehicle qualifies?
- An applicable passenger vehicle that is new, with original use starting with the taxpayer.
- The vehicle must be manufactured for primary use on public roads, streets, and highways. It is required to have a minimum of two wheels (such as a car, minivan, sport utility vehicle, pickup truck, or motorcycle) and a gross vehicle weight rating of less than 14,000 pounds.
- Final assembly of the vehicle must take place in the United States.
- The vehicle must be categorized as a motor vehicle under the Clean Air Act.
But Beware……
Interest paid on lease financing does not qualify for the deduction. However, interest paid on refinanced loans is eligible, but only up to the amount still owed at the time of refinancing. The new loan must also be secured by a first lien on the same vehicle. Under the new OBBBA rules, lenders are required to file a new Form 6050AA with the IRS and provide a copy to the borrower by January 31st. Taxpayers must include the vehicle identification number (VIN) on their tax return for the year the interest is paid to confirm the vehicle meets the U.S. final assembly requirement.
To the extent the vehicle is used for business purposes, any interest allocable to the business use portion of the vehicle would not be subject to the limitations and phase-out of the OBBBA Car Loan Interest Deduction.
Recordkeeping Requirements:
Interest paid on a loan for a vehicle of which is used for business purposes should qualify as an ordinary and necessary expenses paid or incurred in carrying on a trade or business which would not be subject to the limitations and restrictions discussed above.
You must be able to substantiate the business use of the vehicle documenting how many total miles and how many business miles incurred during the year. Keeping a diary with mileage information and copies of repair bills that show odometer readings are essential. Only the percentage use for business use applied against the transportation costs can be deductible.
Deductible local transportation costs generally include the transportation costs for:
(1) traveling between the taxpayer’s main workplace and another workplace within the same local area;
(2) visiting clients or customers in the local area of the taxpayer’s main workplace; and
(3) attending an off-site business meeting in the local area of the taxpayer’s main workplace.
The transportation costs for commuting between the family home and a main workplace are never deductible.
Besides interest paid on the vehicle loan, other transportation costs to consider are depreciation, insurance, repairs & maintenance, fuel, EV charging, parking and tolls.
What Should You Do?
You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It’s important to consult with a tax professional for personalized advice on how these changes might affect your specific tax situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.
