Are You Up to Speed on the Auto Loan Interest Deduction?

The One Big Beautiful Bill Act (OBBBA), enacted in the summer of 2025, introduced a new temporary federal income tax deduction for auto loan interest. On January 2, 2026, the IRS published proposed regulations in the Federal Register clarifying how the write-off works. The deduction is available whether or not taxpayers itemize their returns and applies to the 2025 through 2028 tax years. For individuals and businesses seeking reliable tax accounting solutions Brookfield, this change could represent a meaningful opportunity for tax savings. If you’re working with the best Accounting Services Brookfield has to offer, you can better understand eligibility requirements and ensure the deduction is claimed correctly. Here’s some background to help you get up to speed on this potentially valuable tax break.

OBBBA Provision

Rather than eliminating taxes on auto loan interest, the OBBBA provides a deduction of up to $10,000 for qualified passenger vehicle loan interest. This is defined as interest paid or accrued during the tax year for debt incurred to buy an applicable passenger vehicle (APV) for personal use.

The debt must be secured by a “first lien” — that is, the initial lender has the primary legal claim on the vehicle until the loan is paid off. Interest on leased or used vehicles doesn’t qualify for the deduction. Moreover, not every new vehicle is eligible. An APV must be a car, minivan, van, sport utility vehicle, pickup truck or motorcycle with a gross vehicle weight rating of less than 14,000 pounds.

In addition, to qualify for the deduction, the vehicle’s final assembly must have occurred in the United States. You’ll need to check the vehicle sticker or the National Highway Traffic Safety Administration’s VIN Decoder tool to determine the final assembly location. Don’t make the mistake of assuming that a vehicle sold by an American manufacturer, such as Ford or General Motors, had its final assembly performed in the United States or that “foreign” cars didn’t have their final assembly here.

Although the deduction is capped at $10,000, most taxpayers are unlikely to qualify for the full amount. For example, say you bought a new car in 2025 and financed $50,000 of the purchase price at a 6.5% interest rate for a five-year term. Your total interest paid on the car over the life of the loan would be about $8,700 — but your annual deduction in tax years 2025 through 2028 would be a fraction of that amount. The largest deduction will typically occur in the first year because interest accrues on the unpaid principal, which gradually decreases over time. And you probably won’t be able to deduct any interest in the final year because the deduction is scheduled to expire after 2028, unless Congress extends it.

Remember, this provision is a tax deduction, not a tax credit. That means it reduces your taxable income rather than lowering your tax liability dollar for dollar. As a result, the actual value of the write-off depends on your federal income tax rate — a key detail often highlighted by professionals offering tax accounting solutions Brookfield residents rely on. For example, if your deduction for 2025 totals $3,000 and you fall into the 24% tax bracket, your maximum tax savings would be $720 for the year. Working with the best Accounting Services Brookfield has available can help you accurately calculate the benefit and make informed tax planning decisions.

Bear in mind, too, that the deduction is subject to income-based limits. It begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000 for single filers ($200,000 for married couples filing jointly). The deduction is fully phased out when MAGI reaches $150,000 for single filers ($250,000 for joint filers). Contact your tax advisor for help calculating MAGI for this purpose.

Important: The $10,000 limit applies per tax return, so joint filers can’t claim a $20,000 deduction.

Proposed Regs

The proposed regs clarify many issues related to the deduction. For example, they specify that debt qualifies for the write-off only to the extent it’s incurred for an APV purchase along with other items or amounts customarily financed in an APV transaction, including:

• Vehicle service plans,
• Extended warranties,
• Sales taxes, and
• Vehicle-related fees.

Collision and liability insurance are excluded.

Also addressed in the proposed regs is the proper treatment of so-called “negative equity.” This happens when a taxpayer trades in a vehicle that still has debt exceeding the vehicle’s value, and that remaining debt is rolled into the APV financing. The proposed regulations exclude negative equity from the debt for which a taxpayer can deduct interest.

The proposed regs provide further details on the personal use requirement, too. They make clear that an eligible vehicle needn’t be purchased exclusively for personal use. And the person who incurs the debt doesn’t have to be the person who satisfies the personal use requirement. It can be satisfied by the taxpayer, the taxpayer’s spouse or an eligible dependent child.

The regs propose a 50% personal-use threshold based solely on the taxpayer’s expectation at the time of purchase. Taxpayers aren’t required to re-evaluate personal and nonpersonal use in taxable years after the debt is first incurred. If the actual use subsequently fails to satisfy the requirement, it won’t affect eligibility for the deduction or its amount. However, the write-off is available only for individuals, estates and nongrantor trusts. And the proposed regs uphold the $10,000 per-return deduction limit.

Gear Up

Taxpayers can generally rely on the proposed regs until final regs are published. So, if you’d like to claim the auto loan interest deduction on your 2025 return, raise the issue with your tax advisor. And be prepared: You’ll need to comply with IRS substantiation requirements. These include reporting your vehicle identification number as well as retaining loan agreements and related documents to support the deduction.