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?
2 comments:
Thank you for the excellent breakdown of this provision. I’d like to expand on your observation that this deduction is technically generous but practically irrelevant. The math shows that most taxpayers who qualify based on income will never come close to hitting the $10,000 interest cap, and even those who do will see modest tax savings. Often under $500.
In theory, this deduction shouldn't change consumer behavior. But in practice, many people make financial decisions based on political rhetoric or headlines rather than full analysis. The real concern is that individuals, especially those already stretched thin financially, may take on more debt than they can handle; lured by the promise of a "tax break" they don’t fully understand.
This kind of provision risks incentivizing poor financial decisions in pursuit of a minimal tax benefit. It's one more reminder of why simplification of the tax code should be of paramount importance.
Bob - thanks for the observations. I agree there will be confusion including some may interpret the provision as a credit rather than a deduction, and encouraging consumer debt for little reward is troubling.
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