New Auto Loan Interest Deduction (2025–2028)

What Vehicle Buyers and Business Owners Need to Know

The One, Big, Beautiful Bill (OBBBA) introduced a brand-new below-the-line deduction for interest paid on certain auto loans beginning in 2025.

This is a temporary federal tax benefit available for tax years 2025 through 2028, and it applies even if you do not itemize deductions.

However, the rules are detailed — and not every car loan qualifies.

At Velin & Associates, Inc., we are already reviewing how this deduction impacts:

• High net worth individuals
• Doctors and medical practice owners
• Creators and influencers
• Business owners with mixed-use vehicles
• Professionals purchasing personal vehicles

Let’s break it down clearly.

What Is the New Deduction?

Beginning in 2025, taxpayers may deduct up to:

• $10,000 per year in qualified passenger vehicle loan interest

• Available whether or not you itemize

• Phased out at higher income levels

This deduction applies only to personal-use passenger vehicles, though vehicles with mixed business and personal use can still qualify (more on that below).

Income Phaseout Rules

The deduction begins to phase out when:

• Modified AGI exceeds $100,000 (Single)

• Modified AGI exceeds $200,000 (Married Filing Jointly)

The deduction is reduced by:

• $200 for every $1,000 (or portion thereof) above the threshold

The deduction fully phases out at:

• $150,000 (Single)

• $250,000 (MFJ)

Modified AGI includes AGI plus certain foreign income exclusions.

This makes planning especially important for high-earning professionals and dual-income households.

What Vehicles Qualify?

Not all vehicles are eligible.

The vehicle must:

✔ Be new (original use must begin with you)
✔ Be primarily for use on public roads
✔ Have at least two wheels
✔ Be a car, SUV, pickup, van, minivan, or motorcycle
✔ Weigh less than 14,000 pounds GVWR
✔ Be treated as a motor vehicle under the Clean Air Act
✔ Have final assembly occur in the United States

🚨 Used vehicles do NOT qualify.
🚨 Leases do NOT qualify.
🚨 Salvage-title vehicles do NOT qualify.

This final assembly requirement is similar to rules under the Clean Vehicle Credit and will require verification (likely via VIN lookup or dealer documentation).

VIN Reporting Requirement

To claim the deduction, you must report the vehicle’s VIN (Vehicle Identification Number) on your tax return.

Without the VIN, the deduction will be disallowed.

What Loans Qualify?

The loan must:

• Be an original loan used to acquire the vehicle
• Be secured by the vehicle
• Be incurred after December 31, 2024

Refinancing the original acquisition debt also qualifies.

The following do NOT qualify:

✘ Fleet vehicle loans
✘ Commercial-only vehicles
✘ Lease financing
✘ Loans from related parties
✘ Vehicles purchased for scrap or parts

Mixed Business and Personal Use

Many of our clients — especially creators, doctors, real estate professionals, and Amazon or Shopify sellers — use vehicles both personally and for business.

Here is where it gets strategic.

New Schedule 1-A allows taxpayers to:

• Deduct the business-use portion on Schedule C, E, or F
• Deduct the personal-use portion on Schedule 1-A

Proper allocation will be critical to avoid double-dipping.

Example:

Dr. Smith purchases a new SUV assembled in Texas in 2025.
He pays $9,000 in interest that year.

The vehicle is used:

• 60% for personal use

• 40% for business

Result:

• 40% of interest deductible on Schedule C

• 60% potentially deductible under the new personal auto interest deduction

• Subject to income phaseout limits

Strategic coordination between business deductions and the new personal deduction is essential.

Lender Reporting – New Form 1098-VLI

Lenders must now issue a new form:

Form 1098-VLI (Vehicle Loan Interest Statement)

Required when at least $600 of qualifying interest is paid.

However, for 2025 only, the IRS issued transition relief (Notice 2025-57):

Instead of filing the new form, lenders may provide:

• Online portal access
• Monthly statements
• Annual statements
• Supplemental written statements

Taxpayers may rely on lender-provided information even if the official form is not issued in 2025.

Important Differences From Other New Deductions

Unlike the new deductions for tips and overtime:

✔ There is NO Social Security number requirement beyond normal filing rules
✔ There is NO occupation limitation
✔ It applies to personal-use vehicles only

But remember:

⚠️ California does NOT conform to this new deduction.

California taxpayers will receive a federal benefit — but not a California deduction.

Example Scenarios

Example 1: Married Business Owners

Married couple filing jointly
Modified AGI: $210,000
Interest paid: $8,000

They exceed the $200,000 threshold by $10,000.

Reduction:
$200 × 10 = $2,000 phaseout

Allowed deduction:
$8,000 – $2,000 = $6,000

Example 2: High-Income Professional

Single taxpayer
Modified AGI: $155,000

The deduction phases out completely at $150,000.

Result:
No deduction allowed.

Income timing strategies may become critical for clients near the phaseout range.

Planning Considerations

For 2025–2028 vehicle purchases, planning should include:

• Income projection for phaseout analysis
• Business vs. personal use allocation
• Verification of final assembly location
• VIN tracking
• Coordination with Section 179 or bonus depreciation
• Avoiding related-party financing

For high net worth individuals and business owners, this deduction may influence:

• Timing of vehicle purchases

• Whether to buy new vs. used

• Structuring business vs. personal ownership

• Income timing strategies

California Nonconformity

California does not conform to this new deduction.

This means:

• Federal taxable income may decrease
• California taxable income will not

For Los Angeles taxpayers, this difference affects estimated tax planning.

Final Thoughts

The new auto loan interest deduction may provide meaningful federal tax savings between 2025 and 2028 — but only if structured correctly.

Vehicle assembly location, income levels, financing structure, and use allocation all matter.

This is not simply a “car interest is deductible” rule. It is technical and requires coordination with broader tax strategy.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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