What the New Auto Loan Interest Deduction Means for You
As tax law evolves, new opportunities to save emerge, and one of the most talked-about changes for 2025 through 2028 is the ability to deduct interest paid on certain auto loans.
Under the One Big Beautiful Bill Act, enacted in July 2025, the IRS added a new tax deduction that allows many taxpayers to reduce their taxable income by up to $10,000 of auto loan interest each year, a benefit that didn’t previously exist for most car buyers.
Historically, interest on a personal auto loan was considered personal interest, and personal interest isn’t deductible on your federal tax return, unlike mortgage or student loan interest.
The new law changes that for qualifying auto loans, creating a specific deduction labeled “No Tax on Car Loan Interest.” This means taxpayers can now claim a deduction for interest paid on eligible car loans, even if they don’t itemize deductions, a significant shift in tax-planning strategy.
How the Auto Loan Interest Deduction Works:
- Qualifying Interest
To be deductible, the interest must meet all of the following:
- The loan was originated after December 31, 2024.
- A lien on the vehicle secures the loan.
- The vehicle is purchased for personal use (business-use vehicles are subject to different rules).
- The vehicle was new at the time of purchase (used vehicles generally don’t qualify under this provision).
- Eligible Vehicles
The vehicle must:
- Be a car, SUV, pickup truck, van, or motorcycle, with a gross vehicle weight rating under 14,000 pounds.
- Have undergone final assembly in the United States. If you’re unsure how to confirm this, the VIN and manufacturer’s information can help determine the assembly location.
- Deduction Limits
- You can deduct up to $10,000 of interest per year.
- The deduction phases out based on modified adjusted gross income (MAGI) — starting at $100,000 for single filers and $200,000 for joint filers.
- This phase-out means higher earners may see their deduction reduced or eliminated.
- Claiming the Deduction
To claim it on your tax return:
- Report the vehicle’s VIN on the return for the tax year you’re claiming the deduction.
- Keep your lender’s statement showing total interest paid for the year (similar to Form 1098 for mortgages).
- Consult with us — we’ll help you apply this to your federal return and determine whether it affects state tax filings.
Tax law changes like the new auto loan interest deduction can create valuable savings, but only if they’re applied correctly and coordinated with your overall tax strategy. Our firm works closely with individuals to identify deductions they qualify for, evaluate income phase-outs, and ensure new rules are properly reflected on their tax returns. If you’re purchasing a new vehicle or already paying interest on a qualifying auto loan, we can help determine how this deduction fits into your broader tax picture and maximize your potential tax savings.
