The New Auto Loan Interest Deduction

The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, introduced a brand-new above-the-line deduction for interest paid on auto loans used to purchase a vehicle for personal use. This is the first time personal auto loan interest has been deductible since 1990, and it represents a significant tax break for millions of car buyers. The deduction applies to loans taken out on or after the enactment date for vehicles assembled in the United States.

To qualify, the vehicle must have a manufacturer’s suggested retail price (MSRP) of $100,000 or less, and the loan balance eligible for the deduction is capped at $100,000. Taxpayers can claim the deduction regardless of whether they itemize or take the standard deduction. The interest is reported on Schedule 1-A attached to your Form 1040.

Income-based phase-outs apply: the deduction begins to phase out at $100,000 of modified adjusted gross income for single filers and $200,000 for married couples filing jointly, and is fully phased out at $150,000 (single) or $300,000 (MFJ). The vehicle must be purchased for primarily personal use — business vehicles should continue to use existing depreciation and expense rules.

Example: A single filer with $80,000 in income who pays $3,200 in auto loan interest on a $45,000 vehicle can deduct the full $3,200, saving roughly $704 at the 22% marginal rate.