A new tax deduction for interest paid on vehicle loans will be available starting with the 2025 tax returns, according to tax expert Joy Taylor of The Kiplinger Tax Letter. This initiative, part of the recently enacted One Big Beautiful Bill on July 4, 2023, allows individuals to deduct up to $10,000 in interest for loans on new vehicles purchased for personal use. The deduction is set to expire in 2028.
This temporary deduction benefits both itemizers and those taking the standard deduction. It is classified as a “below-the-line” deduction, which means it reduces a taxpayer’s adjusted gross income to determine taxable income. The deduction begins to phase out for joint filers with a modified adjusted gross income (MAGI) over $200,000 and for other filers at $100,000. It fully phases out at $250,000 for joint returns and $150,000 for individual returns.
Eligibility and Vehicle Requirements
To qualify for this deduction, the vehicle must be a new passenger vehicle intended for personal use. This includes cars, minivans, vans, SUVs, motorcycles, or pickup trucks with a gross vehicle weight rating of less than 14,000 pounds. Additionally, the vehicle must be assembled in the United States. Importantly, loans for used vehicles do not qualify for the deduction.
Lenders are required to file an information return with the Internal Revenue Service (IRS) to report the interest paid by borrowers. To ease the reporting process for the first year, the IRS will allow lenders to provide a total interest amount statement through various means, including online portals or monthly statements. This transitional relief aims to facilitate compliance and ensure that taxpayers receive the necessary information to claim the new deduction.
Understanding MAGI and Tax Reporting
MAGI is a critical factor in determining eligibility for the deduction. It is derived from the adjusted gross income reported on line 11 of Form 1040 or 1040-SR, plus any applicable foreign earned income exclusions and certain other income exclusions. The complexity of the federal tax code means that MAGI can vary depending on the context in which it is used.
For individuals who purchased a vehicle before 2025, such as those who financed a new car in 2023, the interest on those loans will not be deductible in future tax years. The new deduction applies exclusively to vehicles purchased in 2025 or later.
When filing taxes for the 2025 tax year, taxpayers will need to utilize the new IRS Schedule 1-A to calculate their MAGI and the car loan interest deduction. This deduction amount should then be transferred to line 13 of Form 1040. Additionally, it is necessary to include the vehicle identification number on Schedule 1-A.
Taxpayers are encouraged to seek advice from financial or tax professionals regarding their specific situations. The information presented here is intended for general informational purposes and should not be considered as formal financial or legal advice.
As tax laws evolve, there will likely be more questions from taxpayers regarding these changes. The Kiplinger Tax Letter will continue to address reader inquiries in future editions, ensuring that individuals stay informed about their financial obligations and opportunities.
