OBBA’s Auto Loan Interest Deduction: A Tax Break That Could Cost You More

The One Big Beautiful Bill Act (OBBBA) extended many provisions that were set to expire at the end of 2025. In addition to the widely publicized changes, it introduced some lesser-known updates, one of which is the new auto loan interest deduction.  

Can you deduct car loan interest under the One Big Beautiful Bill?

Section 70203 of the OBBBA titled “No Tax on Car Loan Interest,” is a catchy phrase, but it oversimplifies the reality. There are numerous rules, income limits, and vehicle qualifications that determine whether you claim this auto loan tax deduction. 

From 2025 through 2028, the first $10,000 of qualified car loan interest is deductible, regardless of whether you take the standard deduction or itemize. However, the deduction phases out by 20 cents for every dollar your adjusted gross income (AGI) exceeds $100,000 (single) or $200,000 (married filing jointly). That means taxpays with AGIs of $150,000 (single) or $250,000 (married) will not benefit. 

To qualify, the passenger vehicle must: 

• Be a new passenger vehicle (you must be the original owner) 

• Be manufactured for street use 

• Have final assembly in the USA 

• Have at least 2 wheels 

• Weigh below 14,000 pounds 

Campers, RVs, and other off-road vehicles do not qualify. Nor do: 

• Fleet sales 

• Commercial vehicle loans 

• Lease financing 

• Vehicles with a salvage title 

• Vehicles used for scrap or parts 

The payoff: Is the car loan interest deduction worth it?

It’s always nice to have a federal tax deduction to help reduce your liability. But this provision may tempt some to buy a new car when buying used is often the most financially sound decision. 

Let’s break it down: 

• Taxpayers who benefit from the One Big Beautiful Bill car loan interest deduction will be in the 10%, 12%, or 22% tax brackets. Higher-income earners are phased out.  

• According to Bankrate.com the average auto loan interest rate on a 60-month loan is 7.42%.¹ 

• Kelly Blue Book estimates that a new car depreciates about 30% in the first 2 years.² 

If a new car costs $30,000, it may be worth only $21,000 after two years. That means, buying a two-year-old car could save you $9,000 – a significant amount compared to the tax savings from the One Big Beautiful Bill car loan interest deduction if you purchased a new car.  

Let’s do the math: 

• A $30,000 loan at 7.42% over five years results in about $6,000 in interest  

• The federal tax savings would be: 

• $600 at the 10% bracket 

• $720 at the 12% bracket  

• $1,320 at the 22% bracket 

 That’s helpful, but still far less than the savings from buying used.  

Conclusion

In personal finance, we often say, “Don’t let the tax tail wag the investment dog.” In other words, don’t let tax savings drive your financial decisions. Focus on after-tax returns, not just minimizing taxes.  

The same applies here. If you were already planning to buy a new, qualifying vehicle, this auto loan interest deduction is a welcome bonus, especially if your income qualifies. But don’t let this new rule push you into a financially unwise purchase.  

If you have questions on car loan interest deduction provision, or any of the other tax provisions from the OBBBA, contact your wealth advisor. It’s important to plan for how these may impact your tax strategy. Not a client? Let’s talk.  

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