By Sarah J. Ferens, CPA – Tax Manager, and Caleb P. Gozé – Tax Staff

The One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025, as Public Law 119-21, includes several provisions relating to interest expense that will affect individual taxpayers for tax year 2025.  These provisions relate to homeowners with a home mortgage interest deduction and car owners with a new car loan interest deduction.

Home Mortgage Interest Limit Made Permanent

The first provision impacting individual taxpayers is the home mortgage interest deduction on Schedule A. The OBBBA makes permanent the Tax Cuts and Jobs Act (TCJA) provision that limits itemized deductions for home mortgage interest. Under the TCJA of 2017, the mortgage interest deduction is limited to interest on up to $750,000 of home acquisition debt ($375,000 for married filing separately) for any loans taken after December 15, 2017.  Home acquisition debt is defined as mortgage loans taken out to acquire or improve your principal residence or to acquire or improve another residence, such as a vacation home. For mortgages taken on or before December 15, 2017, a higher limit of $1 million of mortgage debt still applies ($500,000 if married filing separately).

The OBBBA also makes permanent the TCJA provision relating to home equity loans. This TCJA provision limits the amount you can deduct related to home equity loans. Generally, one can only deduct interest on a home equity loan to the extent the loan proceeds were used to acquire or improve your principal residence or a second residence. If you meet those conditions, then the home equity loan must next fit within the overall $750,000 ($375,000) home acquisition debt limitation.

Beginning in 2026, the OBBBA expanded the mortgage interest deduction by allowing you to deduct premiums paid for private mortgage insurance (PMI) that covers home acquisition debt. This type of insurance is typically required for conventional loans when the down payment is less than 20% of the purchase price. The mortgage insurance premiums will be treated as a mortgage interest deduction, but the amount allowed as a deduction will begin to phase out once your AGI exceeds $100,000 (or $50,000 if married filing separately).

New Vehicle Loan Interest Deduction

The OBBBA provides for a new interest deduction relating to car loans for qualified passenger vehicles. This new deduction is effective for tax years 2025 through 2028, provided that the vehicle is purchased for personal use and meets other eligibility criteria. The interest paid to finance a new vehicle will be deducted on a new form, Schedule 1-A, rather than being reported on Schedule A with the home mortgage interest deduction. The Schedule 1-A deductions will also include other OBBBA provisions such as the “no tax on tips” deduction, the “no tax on overtime” deduction, and the enhanced deduction for seniors. All of these deductions will be “above the line,” which means that you can deduct interest paid for a car loan while also taking the standard deduction.

There are several conditions to meet for the new vehicle loan interest deduction:

• You can only deduct interest paid on a loan for a newly purchased vehicle with a loan origination date after December 31, 2024.
• If you are leasing a vehicle, the lease payments do not qualify for this deduction.
• You must include the VIN of the vehicle on the tax return if you want to claim the interest paid on the vehicle loan as a deduction on Schedule 1-A.
• The total limit of deductible interest is $10,000, and the deduction phases out after your modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for Married Filing Joint). The deduction is completely phased out if your MAGI exceeds $150,000 or $250,000 for MFJ.

Furthermore, for the interest paid to qualify for the deduction, the vehicle must be for personal use, the loan must secure a first lien on the vehicle, and the vehicle must meet all requirements for a qualified passenger vehicle. The Internal Revenue Code provides the following guidelines to determine if your vehicle would qualify:

• The vehicle’s original use commenced with the taxpayer (purchased new)
• The vehicle is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails)
• The vehicle has at least two wheels
• The vehicle is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle
• The vehicle is treated as a motor vehicle for purposes of Title II of the Clean Air Act
• The vehicle has a gross vehicle weight rating of less than 14,000 pounds
• The vehicle’s final assembly occurred within the United States

For determining final assembly, the location of final assembly will be listed on the vehicle’s information label, which is attached to the vehicle when exhibited for sale on a dealer’s premises. Also, you can look up the vehicle’s place of manufacture to determine whether its final assembly was performed in the US using the VIN Decoder website, a service maintained by the National Highway Traffic Safety Administration (NHTSA).

The OBBBA makes permanent the TCJA limit of $750,000/$375,000 on deductible home acquisition debt interest and continues the restrictions on deductible home equity loan interest. But for tax year 2026, you may be eligible to deduct Private Mortgage Insurance (PMI) premiums as qualified mortgage interest if your AGI is low enough to avoid the phase-out limits.  The OBBBA provides for a new interest deduction in 2025 relating to car loans, as long as the car qualifies as a passenger vehicle used for personal use and meets other IRS guidelines.