Not every person will qualify, and not every vehicle is eligible either (more on that below). But the good news is that unlike many other tax benefits, you don't need to itemize your deductions to claim it.
Let's break down everything you need to know about this deduction, who qualifies, and how to make the most of it.
What Is the Car Loan Interest Deduction?
Starting in 2025 and running through 2028, taxpayers can deduct the interest they pay on loans used to purchase qualifying vehicles for personal use (the maximum amount of interest that can be deducted is $10,000). This is a significant shift in tax policy. For decades, personal interest—including car loan interest—has been non-deductible. Now, Congress has carved out an exception designed to incentivize the purchase of certain vehicles.
The maximum annual deduction is $10,000, which means if you're paying substantial interest on a car loan, you could see meaningful tax savings year after year until the provision sunsets at the end of 2028.
Who Can Claim This Deduction?
Here's the good news: this deduction is available to both itemizers and non-itemizers. That means even if you take the standard deduction (as many taxpayers do), you can still claim this benefit. It functions as an "above-the-line" deduction, reducing your adjusted gross income directly.
However, there are income phase-out limits. The deduction begins to phase out for taxpayers with modified adjusted gross income (MAGI) over:
- $100,000 for single filers
- $200,000 for married couples filing jointly
If your income exceeds these thresholds, the deduction gradually reduces until it's completely phased out at higher income levels. Unfortunately, the IRS hasn't yet released the exact phase-out formula, but guidance is expected soon.
What Qualifies as a "Qualified Vehicle"?
Not every vehicle purchase will qualify for this deduction. The IRS has established specific criteria:
Vehicle Type: The vehicle must be a car, minivan, van, SUV, pick-up truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. This covers the vast majority of consumer vehicles but excludes heavy-duty trucks and commercial vehicles.
New Vehicles Only: The original use of the vehicle must start with you, the taxpayer. In other words, used vehicles don't qualify—even if they're "like new" or certified pre-owned.
Final Assembly in the United States: This is a critical requirement. The vehicle must have undergone final assembly in the United States. You can verify this by checking the vehicle information label on the car at the dealership, or by using the VIN Decoder tool on the National Highway Traffic Safety Administration (NHTSA) website. Simply enter your Vehicle Identification Number (VIN), and it will show the plant of manufacture.
Personal Use: The vehicle must be used for personal purposes, not for business or commercial use. If you use your vehicle for business travel, you'll need to ensure the vehicle is primarily for personal use to qualify. Vehicles used for business should continue to be deducted under business vehicle rules, which are separate from this new benefit.
What Qualifies as "Qualified Interest"?
To claim the deduction, the interest must meet these conditions:
Loan Origination Date: The loan must have been originated after December 31, 2024. If you financed a vehicle in 2024 or earlier, you won't qualify—even if you're still making payments in 2025.
Secured Loan: The loan must be secured by a lien on the vehicle. This is standard for most auto loans, but if you used an unsecured personal loan or credit card to purchase the vehicle, the interest won't qualify.
Vehicle Purchase Purpose: The loan must have been used specifically to purchase the vehicle. You can't deduct interest on a general-purpose loan that you happened to use for a car.
Refinancing: If you refinance a qualifying vehicle loan, the interest on the refinanced amount generally remains eligible for the deduction. This is important if interest rates drop or your credit improves and you want to refinance to save money.
Lease Payments Don't Qualify: If you lease rather than purchase your vehicle, you won't be eligible for this deduction. Only loan interest qualifies.
How to Claim the Deduction
When you file your 2025 tax return (in early 2026), you'll need to give your tax preparer the following:
- Make and Model of the car you purchased
- Vehicle Identification Number (VIN)
- Loan origination date
- Total interest paid in 2025
Your lender will be required to file information returns with the IRS and provide you with a statement showing the total qualified interest you paid during the year. Think of it as similar to the Form 1098 you receive for mortgage interest. Because this is new, and the IRS hasn’t provided final guidance to the lenders yet, please don’t expect an “official” loan document from you lender. Instead, we may be able to simply use an end-of-year statement.
The Bottom Line
The new car loan interest deduction represents a rare opportunity to get a tax break on something most people view as a purely personal expense. For anyone who purchased a vehicle last year, this could translate into real, tangible savings.
As with all tax matters, everyone's situation is unique. If you have questions about how this deduction applies to your specific circumstances—or how to maximize your overall tax strategy—don't hesitate to reach out to a qualified tax professional.
