Background
The One Big Beautiful Bill Act (OB3) signed into law on July 4, 2025 introduced the qualified personal vehicle loan interest (QPVLI), a new temporary tax benefit for certain taxpayers who finance the purchase of a qualifying new vehicle for personal use. In general, interest on a personal car loan has historically been treated as nondeductible personal interest. The OB3 changes that rule for a limited time by allowing certain “qualified passenger vehicle loan interest” to be deducted above the line, meaning eligible taxpayers may claim the deduction whether they itemize deductions or take the standard deduction.
The deduction applies for tax years beginning after December 31, 2024 and before January 1, 2029. The annual deduction is capped at $10,000 per federal income tax return, not per vehicle. As a result, taxpayers with more than one qualifying vehicle must aggregate all eligible interest and may not deduct more than that amount.
The benefit is also subject to an income-based phaseout. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000 for most taxpayers, or $200,000 for married filing jointly (MFJ) taxpayers. Once a taxpayer crosses the applicable threshold, the allowable deduction is reduced by $200 for each $1,000 in excess MAGI, or fraction thereof. For some higher-income taxpayers, this phaseout may significantly reduce or eliminate the benefit entirely.
Taxpayers also should expect compliance requirements. To claim the deduction, the taxpayer generally must report the vehicle identification number (VIN) for the qualifying vehicle on the return in the manner required by the IRS’ forms and instructions. Lender reporting is also expected to play an important role, so retaining annual interest statements and financial records may be important.
Although the rule is technical in origin, its practical takeaway is straightforward: if you purchase a qualifying new, U.S.-assembled passenger vehicle for personal use during the applicable period and finance it with an eligible loan, you may be able to deduct some or all of the interest even if you claim the standard deduction.
How to Claim the Car Loan Interest Deduction
To qualify for the deduction, the taxpayer, the vehicle, and the loan must meet specific requirements.
The deduction is generally available to the following taxpayers:
- Individuals
- Decedents’ estates
- Non-grantor trusts
In certain situations, ownership through a disregarded entity or grantor trust will not prevent the deduction. Instead, the tax rules generally look through those arrangements and test the eligibility of the deemed owner. In contrast, corporations and partnerships are not eligible to claim this deduction, and nonresident aliens generally are not eligible, subject to limited exceptions.
The vehicle itself must be an applicable passenger vehicle. In general, that means the vehicle must:
- Be a new vehicle, so the original use begins with the taxpayer
- Be acquired for personal use (as opposed to business use)
- Be manufactured primarily for use on public streets, roads, and highways
- Have at least two wheels
- Fall within an eligible class, such as car, minivan, van, SUV, pickup truck, or motorcycle
- Have a gross vehicle weight rating of less than 14,000 pounds
- Undergo final assembly in the United States
These requirements are important because not every financed vehicle will qualify. For example, a used vehicle generally will not meet the “original use” requirement, and a new vehicle assembled outside the U.S. also will not qualify. Similarly, heavier vehicles above the 14,000-pound threshold fall outside the definition.
The loan requirements are equally important. The indebtedness generally must:
- Be incurred after December 31, 2024
- Be used to purchase a qualifying passenger vehicle
- Be secured by a first lien on that vehicle at the time the interest is paid or accrued
- Relate to a vehicle acquired for personal use
Simply put, this means the deduction is intended for true purchase-money auto financing on a qualifying new personal vehicle. It is not designed to cover every auto-related financing arrangement.
Refinancing is permitted, but only within limits. If a taxpayer refinances an otherwise qualifying vehicle loan, the new loan generally qualifies only up to the remaining balance of the old loan and only if it remains secured by a first lien on the same qualifying vehicle. Cash-out refinancing can create a nonqualifying portion. Similarly, amounts attributable to negative equity, unrelated add-ons, or certain other nonpurchase items may not generate deductible interest. Loans from related parties are also excluded.
These rules are meant to prevent taxpayers from converting unrelated borrowing into deductible vehicle interest. As a result, buyers should pay close attention to financing documents, payoff amounts, dealer add-ons, and whether the loan truly reflects the purchase price of the qualifying vehicle.
Insight from Forvis Mazars: Before relying on this deduction, confirm that the vehicle checks all the key boxes—not just that it is “new.” U.S. final assembly, weight limits, and personal-use intent matter. Taxpayers who expect income near the phase-out thresholds also may benefit from coordinating the timing of a vehicle purchase with other year-end planning strategies.
Mixed-Use Vehicles Require Additional Analysis
For taxpayers who use a vehicle partly for personal purposes and partly for business or investment purposes, the analysis becomes more nuanced. In some cases, interest on the same vehicle may potentially be treated in different ways depending on how the vehicle is used and how the taxpayer allocates the expense. The personal-use portion may fall under the qualified passenger vehicle loan interest deduction, while any business or investment portion may instead be subject to the separate rules governing business interest or investment interest. Taxpayers should carefully analyze how these rules interact with their specific fact patterns, as the treatment of mixed-use vehicles can affect the overall benefit and may warrant detailed modeling.
A simple example illustrates the issue. Assume a taxpayer buys a qualifying new vehicle in 2025, expects at the time of purchase to use the vehicle more than 50% for personal purposes, later uses it 70% for personal driving and 30% for business, and pays $5,000 of interest during the year. In this situation, the expected personal use at origination may allow the loan to satisfy the personal use requirement for QPVLI purposes. However, to the extent a portion of interest is otherwise deductible as business interest under Internal Revenue Code Section 163(a), that overlapping portion may be deducted either as QPVLI or as business interest, subject to the applicable limitations in each regime, but not both. As a result, taxpayers should model whether treating the overlapping business-use interest as QPVLI or as business interest produces the better overall outcome.
Because these coordination rules can become technical, taxpayers should avoid assuming that every dollar of interest automatically produces the same tax result. Expected personal use at origination, actual business-use treatment, income level, and the taxpayer’s broader tax profile all may affect the analysis.
Insight from Forvis Mazars: Good documentation will be important. Taxpayers should retain purchase contracts, financing agreements, annual lender interest statements, VIN and assembly details, and records supporting the taxpayer’s expected personal use at the time the loan is incurred. If the taxpayer also claims a separate business-interest deduction for part of the same vehicle loan interest, additional records may be needed to support that separate business-use position and avoid duplicating the same interest deduction.
Planning Considerations for 2025–2028
Because this deduction is temporary, planning opportunities are closely tied to timing.
First, taxpayers considering the purchase of a qualifying new vehicle may want to evaluate whether completing the transaction during the 2025 to 2028 window could create a meaningful tax benefit. Vehicles purchased or financed outside of the 2025 to 2028 effective period will not qualify for the deduction. At the same time, taxpayers should remember that the deduction is claimed only for tax years through 2028 under current law. Even if a qualifying loan remains outstanding after 2028, interest paid in later years may not be deductible unless Congress acts to extend the rule.
Second, taxpayers near the phase-out thresholds should consider how other income events may affect the tax benefit. Large bonuses, investment gains, Roth conversions, or business income spikes could reduce or eliminate the deduction in a given year. Where appropriate, broader tax planning may help preserve some or all of the benefit.
Third, refinancing deserves careful review. Refinancing may still preserve deductibility, but only if the new debt stays within the remaining balance of the old qualifying loan and remains secured by a first lien on the same vehicle. Borrowers who take cash out, roll in negative equity, or finance unrelated products and services may dilute or lose part of the deduction.
Fourth, both dealer and third-party financing arrangements, as well as any aftermarket add-ons, should be reviewed with care. Items such as insurance products, service contracts, or unrelated accessories may not qualify in the same way as the core purchase-money debt for the vehicle itself. Even taxpayers who clearly intended to buy a qualifying vehicle can run into problems if the financing package includes too many nonqualifying items.
Finally, taxpayers with mixed-use vehicles should document their expected personal use when the loan is incurred and separately retain records supporting any business-use interest deduction they choose to claim. Consistent documentation can support the chosen reporting position and help evaluate whether treating overlapping interest as QPVLI or as business interest produces the better result.
Insight from Forvis Mazars: The temporary nature of this rule makes proactive planning especially important. Taxpayers who expect to purchase a vehicle, refinance existing qualifying debt, or experience fluctuating income over the next several years may benefit from modeling the deduction in advance rather than waiting until the return preparation period.
How Forvis Mazars Can Help
This new deduction creates planning opportunities, but it also introduces new definitions, documentation requirements, and coordination issues. Our team can help you evaluate whether your vehicle and financing arrangement qualify, estimate the potential tax benefit, and model how the deduction interacts with your income level and filing status.
If you are considering a vehicle purchase, refinancing, or year-end planning strategy, contact us to discuss how this temporary rule may fit into your overall tax picture.