Background
Under the tax code prior to the Tax Reform Act of 1986, taxpayers could deduct most personal interest expenses, including interest paid on auto loans, as itemized deductions. This changed with the Tax Reform Act of 1986 which eliminated the deduction of personal interest under IRC Sec. 163(h), including auto loan interest, credit card interest, and other non-business borrowing. Since 1987, auto loan interest has been classified strictly as non‑deductible personal interest and the 2017 TCJA did not modify the 1986 rules.


BBB Change
Section 70203 of the bill allows a temporary 4-year (2025-2028) deduction for interest paid on auto loans for personal vehicles by amending IRC Sec. 163(h)(4)and (5). This deduction is available even for non-itemizers, meaning it's an above-the-line deduction before AGI. The deduction is only available for loans incurred after 12/31/2024.

Effective for tax years 2025 through 2028, the deduction is limited to the lesser of qualified interest paid or $10,000 annually. To qualify for the deduction, the interest must be paid on a loan that is originated after December 31, 2024 and used to purchase a new vehicle, (used vehicles do not qualify), for a personal use vehicle (not for business or commercial use) and secured by a lien on the vehicle.

If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction according to IRS FS 2025-03. Interest paid to related parties does not qualify for the new deduction.

The deduction phases out beginning at $100,000 AGI for single filers ($200,000 for joint) at a rate of $200 for each $1,000 of AGI above the threshold. AGI needs to be increased by any foreign income exclusion taken. The phaseout will apply against the actual qualifying deductible amount, which may be less than the $10,000 limit.

A qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States. Note that this rule eliminates the deduction for campers, trailers and motor homes. The deduction is available for both itemizing and non-itemizing taxpayers. The taxpayer must include the Vehicle Identification Number (VIN) of the qualified vehicle on the tax return for any year in which the deduction is claimed.

Used or salvage-title vehicles and leased vehicles do not qualify, nor do vehicles bought for resale, parts, or scrap. 

Reporting: Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.


Discussion and Planning
Kiplinger says that about 80% of new car buyers obtained a car loan, and that the average interest rate was 8.64% on an average car costing just under $50,000. Taxpayers with AGI higher than $150,000 single or $250,000 joint will totally phase out from any deduction.

The IRS is expected to create a resource listing qualifying vehicles and models, similar to existing resources for electric vehicle tax credits, to clarify which vehicles meet the final assembly requirement, and several popular imports will not qualify. We assume that the IRS will release a new tax form to report and the interest and provide VIN information.