A new deduction for car loan interest applies to the tax years 2025 through 2028 and allows you to deduct interest paid on a loan used to purchase a qualified vehicle.
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The IRS has released new guidance to help businesses adjust to the new car loan interest reporting requirements under the One Big Beautiful Bill Act (OBBBA). The guidance is formalized in Notice 2025-57, which provides temporary relief and instructions for car loan lenders and other interest recipients who are required to file information returns with the IRS and provide statements to borrowers as the new rules take effect.
The transitional relief is available in 2025 to lenders who are required to file information returns with the IRS and provide statements to borrowers showing the total amount of interest received on qualified car loans.
Reporting Requirements For Lenders
Businesses that receive $600 or more in car loan interest from an individual in a year must follow new reporting requirements. Normally, these lenders must file information returns with the IRS and provide statements to borrowers showing how much interest was paid on qualified passenger vehicle loans.
For context, about 15.9 million new light vehicles (those under 10,000 pounds, including cars, SUVs and trucks) were sold in the U.S. last year, and many of them were financed right at the dealership.
IRS Offers Transition Guidance For Lenders
To help transition to the new reporting process, the guidance notes that the IRS will consider lenders to have met their reporting obligations in 2025 if provide a statement to the buyer indicating the total amount of interest received. This information can be provided:
- On an easy-to-access online portal;
- On a regular monthly statement;
- On an annual statement sent to the borrower; or
- Through another reliable method that clearly shows the total interest.
If lenders follow this guidance, the IRS will not impose penalties for a failure to file information returns and provide payee statements in 2025.
Qualifying Cars (And Other Vehicles) For Purposes Of The Deduction
For purposes of the deduction, a qualified passenger 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.
You can determine where a vehicle underwent final assembly by checking the vehicle’s information label or using the Vehicle Identification Number (VIN)—by law, every vehicle has a VIN displayed on a dashboard sticker or plaque. The 17-digit VIN has a unique combination of numbers and letters used to identify your vehicle. A VIN starting with 1, 4, or 5 typically indicates made in the U.S. Cars made in Canada start with a 2 and vehicles made in Mexico start with a 3. Other countries are denoted with letters—those made in Asia use letters J through R, and those in Europe use letters S through Z.
(Keep in mind that parts are often sourced from many countries, and the cars may then be produced in other countries, so double-check before you buy to make sure the car qualifies.)
How Taxpayers Can Report The Car Interest Deduction
As a reminder, the new deduction for car loan interest applies to the tax years 2025 through 2028 and allows you to deduct interest paid on a loan used to purchase a qualified vehicle. It can be claimed regardless of whether you itemize your deductions.
To qualify for the deduction, the interest must be paid on a loan that originates after December 31, 2024, to purchase a vehicle (leased vehicles do not qualify). The original use of the vehicle must start with you (used vehicles do not qualify). The deduction applies to interest paid on a loan for a personal use vehicle (not for business or commercial use) and must be secured by a lien on the vehicle.
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 that has undergone final assembly in the United States. If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.
To claim the interest, you need to report the vehicle identification number (VIN). After totaling the interest (you can claim more than one vehicle), your tentative deduction is that amount or $10,000 (the maximum deduction), whichever is smaller. As before, there’s one more step—taking the phaseout into consideration. A phaseout means that the tax benefit decreases as your income increases. In this case, the deduction phases out with modified adjusted gross income over $100,000 ($200,000 for joint filers).
Here’s how the calculation works. Let’s assume that you have $8,000 in car loan interest and your MAGI—that number you figured on line 3 in Part I— is $350,000 as a joint filer.
- Compute the excess MAGI over the phaseout threshold ($350,000 − $200,000 = $150,000)
- Compute how much of the deduction is lost due to the phase-out. The phaseout rate results in a $200 decrease in the deduction for each $1,000 that your income exceeds the threshold. So, figure the number of thousands over threshold ($150,000 / $1,000 = 150) and multiply it by $200 (150 × $200 = $30,000).
- Compute allowable deduction. Your final step is to reduce the maximum deduction by the phased-out amount ($10,000 − $30,000 = less than zero).
In our example, you would not qualify for the deduction.
If you back it out, the deduction would be zero once MAGI for a joint filer reaches $250,000. You reach the phaseout much more quickly for this deduction than for the tips or overtime deduction—again, not exactly no tax on car loan interest. All of the provisions are subject to limits and phaseouts.
What’s Next For Taxpayers
The car loan interest deduction is one of a series of new deductions under OBBBA that are largely referred to on the schedule by their popular monikers: No Tax on Tips, No Tax on Overtime, No Tax on Car Loan Interest, and No Tax on Social Security.
You’ll report the deduction alongside those other OBBBA deductions the new Schedule 1-A, Additional Deductions, when you file your 2025 tax return in 2026. The final version of Schedule 1-A hasn’t been released yet, but you can take a look at the draft version here.
And there’s more information to come on OBBBA, so check back with Forbes. To keep it easy, I recommend that you subscribe to our free tax newsletter—that way, the information you need will land in your email inbox each Saturday morning with no additional work on your part.
Source: https://www.forbes.com/sites/kellyphillipserb/2025/10/21/irs-issues-transitional-guidance-on-car-loan-interest-reporting-under-the-new-tax-law/
