Here’s What You Need to Know About the OBBBA Car Loan Tax Deduction

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President Trump signed the "One Big Beautiful Bill Act" (OBBBA) into law on July 4. The massive spending bill introduces a few new tax breaks, one of which will be particularly interesting to people shopping for a new vehicle.

The bill includes a federal tax deduction of up to $10,000 of annual interest paid on new car loans. That could potentially translate to some worthwhile savings for new-car buyers. The deduction is structured as an above-the-line benefit, so taxpayers can claim it even if they claim the standard deduction on their federal returns. But as is often the case with tax law, there are a number of caveats that must be taken into consideration.   

How the new deduction works

Although this tax break took effect on July 4 and will last until the end of 2028, it also retroactively applies to new auto loans that were taken out in 2025 before the passage of the new legislation.

To qualify for the deduction, the vehicle must be a new road-legal car, truck, van, SUV, or motorcycle purchased for personal use and assembled in the United States. It’s worth noting here that not all American vehicles are produced in the U.S. — for example, Ford builds the Maverick pickup and Bronco Sport SUV in Mexico, while Dodge’s Charger Daytona EV is manufactured in Canada, so none of those vehicles would qualify for this tax break. Meanwhile, a number of foreign brands that sell vehicles in the United States have factories in America. Honda produces the Accord in Marysville, Ohio, while Toyota assembles the Camry, RAV4 and Lexus ES in Georgetown, Kentucky, to name a few. You can determine where a vehicle was assembled using its vehicle identification number (VIN).

Who qualifies?

While a $10,000 write-off sounds like a lot, it’s important to keep in mind that most buyers aren’t paying $10,000 in annual auto loan interest to begin with. In order to use the full deduction in the first year of ownership, a buyer would have to take out an auto loan of about $112,000, more than double the average purchase price of a new vehicle in 2025. Additionally, the value of the auto loan interest deduction is reduced if an individual taxpayer’s modified adjusted gross income exceeds $100,000 (or $200,000 for a married couple filing a joint tax return), with the deductible amount dropping by $200 for every $1,000 that the modified adjusted gross income exceeds those limits. The deduction is eliminated entirely if the individual’s annual income is more than $150,000 (or $250,000 for a married couple).

During a recent interview with the New York Times, economist Jonathan Smoke at the market research firm Cox Automotive noted that the average car loan is around $43,000 today. This figure would allow individuals to deduct about $3,000 in the first year of a six-year loan. Smoke explained that this would translate to paying roughly $500 less in taxes that first year, and that amount would shrink for each subsequent year.

That may not be enough to persuade a substantial number of used-car buyers to purchase something new instead, but if you were already planning to purchase a new vehicle, five hundred bucks is a nice chunk of change to keep in your pocket.

A brief window of opportunity for new EV buyers

Another important factor to be aware of is that even though the One Big Beautiful Bill legislation brings an end to the $7,500 federal EV tax credit much earlier than 2032 expiration initially set by the Biden administration as part of the Inflation Reduction Act, this credit for new EV and plug-in hybrid (PHEV) purchases is still in effect until September 30, 2025. And since the OBBBA auto loan interest tax break took effect immediately, this means that new EV buyers have about three months left to bundle these two tax credits together.

As with the OBBBA auto loan interest credit, the federal EV tax credit stipulates that the vehicle must be assembled in the United States and intended for personal use. The vehicle's manufacturer suggested retail price (MSRP) also cannot exceed $80,000 for vans, sport-utility vehicles and pickups or $55,000 for cars. Additionally, adjusted gross income cannot exceed $150,000 for an individual, $225,000 for a head of household, or $300,000 for a married couple filing jointly. 

The vehicle's battery capacity also plays a role in the credit amount that it’s eligible for, so it’s a good idea to peruse the factors involved before you sign on the dotted line. The specifics of the federal EV tax credit can be found here.

Measured relief

Despite the limited benefit of the OBBBA auto loan interest tax credit for the average cost of a new vehicle, anything that helps reduce the financial strain on buyers, who are now faced with rising costs due in part to the auto tariffs implemented earlier this year, will certainly come as welcome news.

That said, buyers also need to keep in mind that realizing the maximum benefit of this tax break would require a loan amount that represents about 1% of all auto loans in the United States and, for individuals, also would mean having an annual income that's less than the vehicle's purchase price. 

Generally speaking, most financial advisers recommend committing less than 20% of one's post-tax monthly income to car payments. But in today's market, that’s becoming a significant challenge.