H.R. 1 OBBBA's New Limited Deduction for Interest on Car Loan

H.R. 1, the One Big Beautiful Bill Act (OBBBA) (officially known as An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14) was signed into law on July 4, 2025. It has just over 100 tax changes! One of these is at SEC. 70203, No Tax on Car Loan Interest. Technically, it is a deduction for interest on certain car loans available to individuals below specified modified AGI levels, whether or not they itemize.

In reviewing the details, it doesn't seem that it will benefit too many people because the Senate added a requirement that it must be a new vehicle (the House allowed the deduction for a used vehicle), the income levels are low relative to the average price of a new vehicle being almost $50,000, and the eligible individuals having a marginal tax rate of 10%, 12% or 22% will find that the tax savings will be less than the money savings of buying a used car. Note that by "benefit" I don't mean just getting a lower tax bill, but having to spend more money to get the tax break when comparing the cost differential between a new and used vehicle.

Here is my summary of this new provision and some observations and an example (it's a bit long as is SEC. 70203!).

•        §163(h)(4)

•        Existing (h)(4) becomes (h)(5).

•        Deduction available for 2025 through 2028.

•        Deduction from AGI even if don’t itemize.

•        Apparently also allowed for AMT.

•        Qualified Passenger Vehicle Loan Interest - Debt incurred after 2024 for purchase of, and secured by, a first lien on “applicable passenger vehicle” for personal use.

•        Refinancing of such debt that doesn’t exceed balance at refinancing date.

•        No related party financing.

•        Interest deduction can’t exceed $10,000 for any tax year.

•        Phaseout - Reduce otherwise deductible amount by $200 for each $1,000 or portion thereof by which MAGI exceeds $100,000 ($200,000 if MFJ)

•        MAGI = AGI + §911, §931 and §933 exclusions

•        Must include VIN on return.

•        “Applicable passenger vehicle”

•        Original use starts with taxpayer.

•        Manufactured primarily for use on public roads.

•        Has at least 2 wheels.

•        Is a car, minivan, van, SUV, pickup truck or motorcycle.

•        Treated as a motor vehicle under Title II of Clean Air Act.

•        Has gross vehicle weight of less than 14,000 pounds.

•        Final assembly was in the U.S. (§163(h)(4)(E)(i)) (Observation: Likely dealer will have info.)

•        New §6050AA – lender required to issue information report (likely 1098 type) if interest is $600 or more. Must show origin date of loan and year, make, model and VIN of vehicle, and other info required by IRS.

•        Observations:

•        Interest rates on new cars per B of A at July 2025 is 5.64%.

•        Higher if have poor credit score.

•        Average new car price per Kelley Blue Book is $49,740.

•        Loan amount to generate $10,000 of interest expense is

•        $166,667 if interest rate if 6%

•        $ 76,923 if interest rate is 13%

•        Once MAGI reaches following, no interest deduction:

•        $150,000

•        $250,000 if MFJ

•        If financing 80% of new car costing $45,000 (so loan of $36,000), likely need income of $30,000 before taxes (but also relevant other expenses and debts outstanding).

•        Interest expense on $36,000 loan at 6% = $2,160

•        Tax savings at marginal rate of

•        12% = $259

•        22% = $475

•        Given price difference between new and used vehicles, tax savings of deducting interest not enough to justify buying a new versus used vehicle.

•        Example:

•        1/2/25 - Amy, single, with 2025 MAGI of $110,000 purchased new car for personal use for $35,000 and financed $30,000 with dealer at 6%.

•        Car assembled in U.S.

•        2025 interest expense is $1,800

•        Amy’s MAGI of $110,000 requires her to reduce deduction by 10 x $200 or $2,000, but not below $0 so she has no possible deduction.

•        If Amy’s MAGI were instead $100,000, she can deduct entire $1,800 of interest. Savings for Amy who has marginal rate of 22% is $396.

•        Observation: Amy will save far more than $396 per year for four years by purchasing a used vehicle and having a smaller loan or buying a less expensive new car with a smaller loan.

My take: Given that the people who qualify for this won't have $10,000 of interest expense, the phaseout level starts at fairly low amounts for people likely to be able to afford a new car, the reporting requirement for lenders, this provision should have been omitted and the $30 billion it costs the fisc over 4 years (per JCX-35-24 (7/1/25)) should have been used for deficit reduction.

Comments?  Do you think I got anything wrong?

What do you think?