We’ve all been there. At the most inconvenient time possible, the family car decides it has driven its last mile. You go to the car dealership one sunny day and quickly realize that used cars today do not show the big price differences they had in years past, adding insult to injury. Whether to buy new or used usually comes down to cost and personal preference; however, recent tax law changes in the One Big Beautiful Bill Act (OBBBA) may make the choice an easier one for the next few years.
For individual taxpayers starting in 2025 and through 2028, with certain caveats, interest on purchases of new vehicles may be deducted on their 1040. As consumer credit generally hasn’t been deductible for individuals since the early 1980’s, this is a big, positive change in Federal tax policy.
For the business owner, there has been no change in tax law in this area. Business taxpayers who deduct actual vehicle-maintenance expenses are also allowed to deduct interest, but not principal, on a business-held loan. This does not include business taxpayers who instead deduct the IRS standard mileage amount as an expense, currently 70.0 cents per mile in 2025 and 72.5 cents in 2026.
What’s Old is New Again for the Individual Consumer
Prior to the passage of the Tax Reform Act of 1986, most interest on consumer credit was deductible for individuals as an Itemized Deduction, meaning of course, that those who did not itemize on their tax return could not deduct any interest paid to financial institutions. The ’86 tax law disallowed many itemized deductions on an individual’s tax return, of which interest on auto loans was one, until the passage of the OBBBA in 2025.
For the years ending December 31, 2025, through 2028, new vehicles meeting final assembly within the United States criteria can potentially qualify as a deduction for any interest paid or accrued on a first lien on the vehicle. The interest is allowed as an Above-The-Line deduction on an individual tax return, generally meaning they do not have to itemize on their tax return to receive this benefit. This includes new loans received on a new vehicle purchased after December 31, 2024. Leases specifically do not qualify for this deduction. Other considerations include a limit on the deduction of $10,000 overall, and the deduction is limited by $200 for every $1,000 for any taxpayer’s income that exceeds $100,000 if single and $200,000 if a joint tax return. To put this in perspective, a single individual with a Modified Adjusted Gross Income of $130,000 will be able to deduct a maximum of $4,000 in auto loan interest (30 x $200 = $6,000; $10,000 - $6,000 = $4,000).
Reporting Deductible Interest to the Consumer
Congress passed the OBBBA in Mid-2025. To give financial institutions time to develop reporting systems, the IRS released transitional guidance on December 31, 2025, providing clarification on qualifying vehicles and consumer loans. For lenders, it provided at a minimum that qualifying interest over $600 must be reported to consumers on an information return, commonly known as a Federal Form 1098, however, for the 2025 tax year (only) the IRS will not assess failure to file penalties if the lender reports the interest amount on a monthly and annual statement and provides an easy to access online portal or report for consumers to access this information. We fully expect that, for 2026 through 2028, this information will be reported to consumers in a similar manner to mortgage interest on a year-end 1098 form.
Conclusion
Purchasing a vehicle can be a hectic and expensive process. Understanding and utilizing tax law to your advantage allows taxpayers to plan and reduce their overall tax liability, thereby improving long-term cash flow. As always, we are available to answer any questions.
Jim Schmersahl, CPA, is a Partner at Schmersahl Treloar. He can be reached at 314.966.2727. Alan Dierker is a Tax Manager at Schmersahl Treloar. She can be reached at 314.966.2727.