The One Big Beautiful Bill Act (OBBBA) introduced a significant tax benefit for new car buyers starting in the 2025 tax year. This provision allows taxpayers to deduct interest paid on qualifying auto loans without itemizing deductions—a rare opportunity for substantial savings.

Key Highlights of the Deduction

• Deduction Amount: Up to $10,000 annually for interest paid in tax years 2025–2028.
• Eligibility: Applies to interest paid on loans for eligible new passenger vehicles purchased after December 31, 2024.
• Above-the-Line Deduction: No need to itemize to claim this benefit.
• Income Phaseout Limits: Begins at $100,000 for single filers and $200,000 for joint filers; fully phased out at $150,000 ($250,000 joint).

Eligible Vehicles

To take full advantage of the tax deduction, understanding which vehicles qualify is crucial. The bill specifically excludes any vehicle that was not finally assembled in the United States. This means that even if the brand is American, the vehicle must complete its final assembly step domestically to be eligible.                                            

• New vehicles only: Used cars do not qualify for the deduction.
• Personal use: The vehicle must be purchased for non-commercial, personal use.
• Vehicle types: Eligible vehicles include cars, minivans, SUVs, pickup trucks, and motorcycles weighing less than 14,000 pounds gross vehicle weight rating (GVWR).
• Final assembly in the U.S.: This is verified via the vehicle’s information label or VIN, which can be checked through authoritative sources like the National Highway Traffic Safety Administration (NHTSA) VIN decoder. https://www.nhtsa.gov/vin-decoder

Loan Requirements

In addition to vehicle eligibility, there are certain loan terms that must be met as well to qualify for the deduction.

• Origination Date: After December 31, 2024.
• Security: Must be secured by a first lien on the vehicle.
• Use: Vehicle must be for personal use.
• Lender Restrictions: Loans from related parties are not eligible.
• Lease Payments: Leases are excluded from this deduction.

Required Documentation for Tax Returns

• File the Appropriate Tax Schedule: Borrowers must file this new schedule (Schedule A-1) with their 2025 federal income tax return.
• VIN Reporting: Vehicle Identification Number must be included on the tax return. 
• Interest Statement: Taxpayers need documentation showing the total interest paid on the loan for the year. However, for the 2025 tax year, the IRS has granted lenders transitional relief, allowing them to provide the interest information to borrowers through various means, including online portals, monthly statements, or an annual statement in lieu of a 1098 or similar form.

How to Determine Vehicle Final Assembly Location

• Check VIN: VINs starting with 1, 4, or 5 indicate U.S. assembly.
• Manufacturer Label: Located on the driver-side door jamb.
• NHTSA VIN Decoder: Use the official tool to confirm assembly location.
   Visit the NHTSA VIN Decoder: https://www.nhtsa.gov/vin-decoder

Final Thoughts

The 2025 tax year brings a rare chance for many to save big on their next vehicle purchase. By leveraging the new car loan interest deduction, you can reduce your taxable income without the hassle of itemizing—just make sure your vehicle meets the eligibility criteria and you keep your documentation organized. Remember, lenders are not obligated to issue specialized IRS forms at this time, the responsibility to claim this benefit rests with you.