NEW DEDUCTION FOR CAR-LOAN INTEREST: WHAT YOU NEED TO KNOW
What is the law?
In the tax and spending legislation signed on July 4, 2025, a new above-the-line deduction was introduced for interest paid on a loan used to purchase a qualifying personal vehicle.
That means taxpayers may claim the deduction even if they use the standard deduction (i.e., they don’t have to itemize) rather than only those who itemize.
Which law?
The bill is the One Big Beautiful Bill Act (sometimes referred to as OBBB), enacted pursuant to H.R. 1 in the 119th Congress.
Why the change?
The deduction is designed to incentivize purchase of U.S.-assembled vehicles, boost American auto manufacturing jobs, and reduce the after-tax cost of vehicle financing for eligible consumers.
Who qualifies for the deduction?
Eligible taxpayers:
● The deduction applies for tax years 2025 through 2028 (so vehicles purchased in those years, interest paid in those years).
● It is available to individual taxpayers, including those who take the standard deduction (because the deduction is “above-the-line”).
● There is a phase-out based on modified adjusted gross income (MAGI): for single filers, full benefit up to ~$100,000 MAGI; for joint filers, full benefit up to ~$200,000; beyond that the deduction phases out, and above ~$150,000 (single) or ~$250,000 (joint) the deduction is eliminated.
Eligible vehicles & loans
To qualify, both the loan and the vehicle must meet several conditions:
● The loan must originate after December 31, 2024.
● The loan must be used to purchase a new vehicle, whose original use commences with the taxpayer (i.e., a used car generally does not qualify).
● The vehicle must be used for personal use, not for business or commercial fleet use.
● The vehicle must be an automobile, minivan, van, sport utility vehicle (SUV), pickup truck or motorcycle, with gross vehicle weight rating (GVWR) under 14,000 pounds.
● The vehicle must have undergone its final assembly in the United States. This is verifiable via the vehicle information label or VIN.
● The loan must be secured by a lien on the vehicle (i.e., the vehicle serves as collateral under the loan).
Deduction amount
● The maximum deduction is $10,000 per year of interest paid on the qualifying vehicle loan.
● Because this is an above-the-line deduction, it reduces the taxpayer’s adjusted gross income (AGI) rather than only reducing itemized deductions.
Does it apply to leases?
No, lease payments do not qualify for the deduction. The law explicitly states that the deduction is for interest paid on a loan used to purchase the vehicle.
So if you lease a vehicle (i.e., you are paying lease payments rather than paying loan interest on a purchase), you would not be eligible for this particular deduction.
How to claim it: Steps & Tips
1. Confirm vehicle eligibility before purchase:
● Check that the vehicle’s final assembly was in the U.S. (via the label on the vehicle or VIN check) because foreign-assembled vehicles do not qualify.
● Ensure the loan begins after December 31, 2024, and the purchase is new (original use with you).
● Make sure the vehicle is for personal use and meets the weight and type (under 14,000 lbs, car/minivan/SUV/pickup/motorcycle).
● Retain documentation of the loan (interest paid), the lien securing the vehicle, and vehicle purchase date.
2. During tax preparation for tax years 2025–2028:
● On your federal income tax return, claim the above-the-line deduction for the interest you paid on the qualified vehicle loan (up to $10,000).
● Adjust your AGI by subtracting the eligible interest (subject to phase-out limitations).
● If your MAGI exceeds the phase-out threshold, compute the reduced deduction accordingly (the law phases out the benefit above certain income levels)
3. Record-keeping:
● Keep loan statements showing interest paid.
● Keep the vehicle purchase invoice showing assembly, purchase date, and new status.
● Keep the vehicle’s VIN and label info showing final assembly in U.S.
● Keep documentation showing vehicle is used personally (not business/fleet).
● If you refinance the loan, interest on the refinanced amount may still qualify, provided the original loan qualified and you meet the rules.
4. Consult your tax advisor:
Because there are many conditions, income thresholds, and the deduction is newly introduced with limited guidance so far, it’s wise to consult a qualified tax professional.
Things to Watch / Important Caveats
● Used vehicles are excluded: Buying a used car does not qualify for this deduction.
● Leases do not qualify: As noted above, if you’re leasing rather than buying, you cannot claim the deduction.
● Vehicle assembly location matters: Even if the manufacturer is a U.S. brand, if the vehicle was assembled abroad, it may not qualify.
● Income phase-out: If your MAGI is high, the deduction may be reduced or eliminated. A taxpayer should calculate carefully.
● Time-limited: The deduction is only in effect for tax years 2025-2028. Purchases outside those years may not qualify under this provision.
● Business vs personal use: If the vehicle is used for business, commercial fleet, or is a heavy vehicle (over 14,000 lbs. GVWR) the rules may differ; this deduction is targeted at personal-use vehicles.
● Administrative/Reporting obligations: Lenders may be required to report interest paid on qualifying vehicle loans to the IRS (new reporting threshold applies).
● State tax treatment: This is a federal deduction; check how your state treats this deduction (some states may or may not conform).
● Other tax implications: Though this deduction may reduce AGI, it may affect eligibility for other deductions/credits tied to AGI, so the net tax benefit should be reviewed in your full tax context.
