As the months continue to pass, the aftermath of the One Big Beautiful Bill (OB3) Act continues to push the IRS to release guidance on the dozens of new tax provisions within the bill, one of the more interesting of which is the deduction for car loan interest (officially termed “qualified passenger vehicle loan interest”).
In this article, we are going to take a moment to cover some of the transitional relief for the 2025 tax year as it relates to reporting of the interest to the borrower and reporting the deduction on Form 1040.
Taxpayers who purchase a new vehicle with final assembly in the US may deduct interest they pay on the loan for that vehicle, as long as the loan origination date was after December 31, 2024. Vehicles purchased prior to 2025 may be eligible for the deduction, provided the borrower refinances the vehicle during 2025 through 2028, but only to the extent the new loan does not exceed the refinanced amount. Borrowing money from a related party to purchase an applicable passenger vehicle is not a qualifying loan.
To file a tax return claiming a car loan interest deduction, the taxpayer must report the vehicle’s VIN. Note that tax professionals should verify that the vehicle had final assembly in the US, which can be done by visiting either of the following .gov websites:
Most vehicles will qualify for the car loan interest deduction so long as they are manufactured for use on public streets, roads, and highways, and even interest paid for motorcycles may qualify. The limitation for most taxpayers attempting to claim the deduction will be the income phase-out threshold. While the maximum deduction may be up to $10,000, the income phaseout begins at $100k ($200k MFJ). For each $1,000 the taxpayer’s income exceeds the threshold, their qualifying vehicle loan interest is reduced by $200.
There is no requirement that married taxpayers file a joint return to be eligible for this deduction, so it may be worth considering filing MFS if the taxpayer’s vehicle loan interest exceeds $10k and there are no other disadvantages to filing separately.
How do I know how much interest was paid?
The OB3 Act created a requirement for lenders to issue reporting documents specific to vehicle loan interest. However, for 2025, the IRS will not enforce these requirements and instead requires auto lenders to issue either a monthly or an annualized statement showing the amount of interest paid by the taxpayer on their qualifying vehicle loan. For 2026 through 2028, auto lenders will be required to issue a 1098-VLI to taxpayers to show the amount of qualifying car loan interest they paid.
Where will this deduction be reported?
The car loan interest deduction, along with the deduction for qualifying tips, overtime, and seniors, will be reported on Schedule 1-A and then flow over to Form 1040 of the individual income tax return. This deduction occurs after AGI is calculated, but is included in the calculation to reduce taxable income.
Want to know more about this and the other new tax laws coming at us for 2025 tax return filings? Join us for our Update for 2025 Returns! With in-person events at over 20 locations in California and Nevada, as well as on-demand options, you won’t want to miss the best update seminar of the year. Find your location and register here.