Car Loan Interest Deduction (OBBBA Schedule 1A): What CPAs Need to Know

The One Big Beautiful Bill Act (OBBBA) added a new above-the-line deduction for qualified motor vehicle loan interest — up to $10,000 per year — for taxpayers who financed a new American-assembled vehicle. The deduction is claimed on a new Schedule 1A attached to Form 1040 and reduces adjusted gross income regardless of whether the taxpayer itemizes. It applies to tax years 2025 through 2028. For CPAs with individual clients who bought new domestic vehicles on credit, this deduction requires a new data-collection step, a phase-out calculation, and awareness of what makes a vehicle "qualifying" under the statute.

What the Deduction Covers

The OBBBA car loan interest deduction allows eligible taxpayers to deduct interest paid on a qualified motor vehicle loan from their federal AGI. A qualified motor vehicle loan is any loan used to acquire a new passenger vehicle — including cars, light trucks, and SUVs — where the vehicle is assembled in the United States. The deduction is not available for used vehicles, leased vehicles, or vehicles manufactured outside the U.S.

Annual cap: The deduction is limited to $10,000 per year in actual interest paid. For borrowers who paid less than $10,000 in interest during the year, the deduction equals actual interest paid. For those who paid more, it caps at $10,000 regardless of total interest.

Above-the-line treatment: Because this is an above-the-line deduction (an adjustment to income under IRC §62), clients claim it whether they take the standard deduction or itemize. This distinction matters for planning: even clients who have always taken the standard deduction benefit fully. See the Standard Deduction vs Itemized Deductions guide for context on how this fits into the broader deduction decision.

Sunset: The deduction is temporary. It applies to tax years beginning after the OBBBA's enactment date and ending before January 1, 2029. Clients who purchase qualifying vehicles in 2025 through 2028 and carry those loans into 2029 will lose the deduction on future interest payments.

The Domestic Assembly Requirement

The most operationally significant eligibility criterion is the domestic assembly rule. The vehicle must be finally assembled in the United States to qualify. Assembly location — not brand ownership or headquarters — controls the analysis. A vehicle designed by a U.S. company but assembled in Mexico does not qualify. A vehicle built by a foreign automaker in a U.S. plant does qualify.

How to verify: The vehicle identification number (VIN) encodes final assembly location in the 11th character position, but the most reliable verification source is the American Automobile Labeling Act (AALA) disclosure, which dealers are required to provide at point of sale and which lists the U.S. and Canadian content percentage and assembly location. The National Highway Traffic Safety Administration (NHTSA) also maintains a searchable database at nhtsa.gov where CPAs or clients can confirm a VIN's final assembly plant.

Practical advice for clients: Instruct clients buying new vehicles in 2025 and beyond to confirm assembly location before purchase if the deduction matters to their tax planning. Many popular models have multiple assembly locations depending on the trim level or model year. A 2025 and a 2026 version of the same model may be assembled in different plants.

Income Phase-Out

The car loan interest deduction phases out at higher income levels. The phase-out is based on modified adjusted gross income (MAGI) and applies as follows:

The phase-out reduces the maximum deductible amount proportionally over the $50,000 phase-out range. A single filer with $125,000 MAGI — midpoint of the phase-out range — can deduct a maximum of $5,000 in interest (50% of the $10,000 cap). The formula:

Deduction limit = $10,000 × (1 − [(MAGI − threshold) ÷ $50,000])

For clients in the phase-out range, MAGI management matters. Because this is an above-the-line deduction, it reduces AGI and can in turn lower MAGI for other phase-out calculations — but the car loan deduction phase-out is computed on a pre-car-loan MAGI, so there is no circularity. Plan around retirement contributions, health savings account (HSA) contributions, and other above-the-line deductions to help clients below $100,000/$200,000 stay there.

The phase-out also interacts with the SALT cap planning implications under OBBBA: clients near the $500,000 SALT phase-out threshold are well above the car loan phase-out, but clients between $100,000 and $200,000 (single/MFJ) have the most to gain from coordinated planning across both provisions.

Reporting on Schedule 1A

The OBBBA created a new Schedule 1A — a standalone attachment to Form 1040 — to capture several of the Act's new above-the-line deductions in a single location. The car loan interest deduction is reported on Schedule 1A, with the result flowing to Schedule 1 (Additional Income and Adjustments), Part II, as a new line item reducing AGI.

For the 2025 tax year return (filed in 2026), CPAs should expect IRS to release a finalized Schedule 1A during 2026 filing season. Draft forms and instructions are typically released in November or December of the tax year. Monitor IRS Draft Forms at irs.gov/draft-forms for updated Schedule 1A releases.

Documentation to collect from clients:

1. Lender Form 1098 (or equivalent interest statement) showing total mortgage/vehicle interest paid — note that auto lenders are not currently required to issue a Form 1098 for vehicle loans the way mortgage lenders are, so clients may need to obtain an annual interest statement directly from their lender
2. Vehicle purchase agreement confirming the vehicle is new (not used)
3. AALA disclosure or NHTSA VIN confirmation showing U.S. final assembly

If a client cannot produce documentation of U.S. assembly, the deduction is not available. There is no substantial authority basis for claiming this deduction without the assembly verification.

Interaction with Other OBBBA Deductions

The OBBBA enacted several simultaneous above-the-line deductions — including the tip income deduction and overtime pay deduction — all flowing through Schedule 1A. Clients who qualify for multiple OBBBA deductions stack them, and the combined effect on AGI can be meaningful for phase-out calculations elsewhere in the return.

Key interactions to model:

• QBI deduction: Lower AGI from OBBBA deductions may help clients stay under the QBI phase-out thresholds (for 2025: $197,300 single / $394,600 MFJ before the 23% OBBBA expansion). See the QBI deduction guide for how the OBBBA adjusted these thresholds.
• Additional Medicare Tax: Reducing MAGI below the $200,000/$250,000 Additional Medicare Tax threshold via combined OBBBA deductions can eliminate a 0.9% surtax on earned income.
• ACA subsidy cliff: For clients purchasing marketplace health coverage, lower MAGI from OBBBA deductions may improve premium tax credit eligibility.
• Estimated tax underpayment: If a client did not account for these new deductions in their 2025 estimated tax payments, they may have overpaid. See quarterly estimated tax planning for how to recalibrate withholding and estimated payments.

Vehicles That Do and Don't Qualify

This is likely the most common client question. A summary of common scenarios:

Qualifies:

• New domestic sedan, SUV, or light truck assembled in the U.S. with financing
• Vehicle assembled in the U.S. by a foreign automaker (e.g., a Toyota assembled in Georgetown, KY)
• Vehicle with split U.S./Canada assembly content, if final assembly occurred in the U.S.

Does not qualify:

• Used vehicles (even if originally assembled in the U.S.)
• Leased vehicles (the taxpayer does not hold a qualified motor vehicle loan — the lessor owns the vehicle)
• Vehicles assembled in Canada, Mexico, or other non-U.S. locations
• Business vehicles deducted under Section 179 or bonus depreciation — the car loan interest deduction is an individual taxpayer provision applicable to personal-use vehicles, not vehicles for which the taxpayer is taking a business deduction
• Electric vehicles that have already been claimed under the §30D clean vehicle credit are not per se excluded, but CPAs should confirm the specific interaction with the final Schedule 1A instructions

Planning Implications for 2025 and Beyond

New client intake question: Add a vehicle purchase and financing question to your 2025 tax organizer. Clients who purchased a new American-assembled vehicle in 2025 with a loan need to collect interest documentation.

MAGI positioning: For clients between $80,000 and $100,000 MAGI (single) or $160,000 and $200,000 (MFJ), contribution planning — HSA contributions, traditional IRA contributions if deductible, retirement plan deferrals — may bring MAGI below the phase-out threshold and unlock the full $10,000 deduction.

Sunset awareness: The deduction expires after 2028. Clients who purchase vehicles with long loan terms (60–84 months) should understand they receive the deduction only for interest paid through December 31, 2028, not for the full life of the loan.

Business vs. personal split: A client who uses a vehicle for both business and personal use and claims a business deduction for the business portion cannot also claim car loan interest on the same business-use portion as an OBBBA deduction. The deduction applies to personal-use vehicle financing only. If a client uses a vehicle 60% for business and claims that portion under Section 179 or standard mileage, only the interest attributable to the 40% personal use is potentially eligible for the OBBBA deduction. Await final IRS guidance on how to compute this allocation.

FAQ

What if my client didn't get a Form 1098 from their auto lender?

Auto lenders are not required to issue Form 1098 for vehicle loans. Clients should request an annual interest statement directly from their lender. A bank or credit union account portal often provides this in transaction history. Document the source in the workpaper.

Can my client deduct car loan interest on a vehicle bought in late 2024?

Only interest paid in 2025 and later qualifies. The deduction is not retroactive. A vehicle purchased in 2024 with a loan that runs into 2025 and 2026 can generate qualifying interest in those later years, as long as the vehicle was new and assembled in the U.S. at the time of purchase.

Does the deduction apply to business vehicles?

No. The OBBBA car loan interest deduction is an individual above-the-line deduction for personal-use vehicles. Business vehicles are already subject to their own deduction regimes (Section 179, bonus depreciation, or MACRS for actual expense method, or the standard mileage rate). Taxpayers may not double-dip. If a client deducts vehicle costs as a business expense, they cannot also claim the OBBBA car loan interest deduction on the same costs.

Is the deduction per vehicle or per taxpayer?

The $10,000 cap is per taxpayer per year, not per vehicle. A client with two qualifying vehicles and two loans can aggregate the interest paid on both, but the combined deduction cannot exceed $10,000. Married filing jointly filers share the single $10,000 cap.

What if we're waiting on IRS guidance before filing?

The IRS will issue Notice guidance and finalized Schedule 1A instructions before the close of the 2025 filing season. If a client's return is complex or the vehicle assembly status is unclear, file an extension using Form 4868 to preserve time. See business tax extension rules for the extension-filing mechanics and payment implications.

What documentation should I keep in the workpaper file?

At minimum: (1) auto loan origination document showing the vehicle is new, (2) NHTSA VIN confirmation or AALA disclosure confirming U.S. final assembly, (3) lender's annual interest statement or equivalent showing interest paid in the tax year. These three documents establish the deduction's factual predicate.

Arvori helps CPAs connect clients with insurance professionals who understand the financial context behind their decisions. For clients who financed a vehicle for business and personal use, coordinating auto coverage with the tax treatment is a natural conversation — explore how Arvori supports CPA-broker collaboration.