For the first time in nearly 40 years, personal car loan interest is tax-deductible. Under the One Big Beautiful Bill Act (P.L. 119-21) signed into law on July 4, 2025, taxpayers can deduct up to $10,000 of interest paid on qualifying new vehicle loans for tax years 2025 through 2028. The deduction is above-the-line, meaning you can claim it whether or not you itemize.
The deduction has specific eligibility rules. The vehicle must be new (no used cars), must undergo final assembly in the United States, and must have a gross vehicle weight rating under 14,000 pounds. There are also income-based phaseouts that limit or eliminate the deduction for higher earners. Both the vehicle and the borrower need to qualify for the deduction to apply.
Key Eligibility Rules
| Requirement | Detail |
|---|---|
| Vehicle type | New passenger vehicles only (car, SUV, van, pickup, motorcycle) |
| Final assembly | Must be in the United States (verified via VIN) |
| Vehicle weight | Under 14,000 pounds GVWR |
| Used vehicles | Not eligible |
| Loan origination | After December 31, 2024 |
| Maximum deduction | $10,000 per tax year |
| Time frame | Tax years 2025–2028 |
| Filing status | Above-the-line; available with standard or itemized deductions |
How to Verify a Vehicle Qualifies
Final assembly location is the trickiest part — it’s a per-VIN determination, not a per-model one. A vehicle from the same model line can qualify or not depending on which plant assembled it.
For example, a Tesla Model 3 assembled in Fremont, California qualifies. A BMW X5 assembled in Spartanburg, South Carolina qualifies. A BMW 3-Series assembled in Germany does not. Always check the VIN before assuming a model qualifies.
The National Highway Traffic Safety Administration (NHTSA) VIN Decoder is the official way to verify final assembly location.
Income Phaseouts
The deduction phases out at higher incomes. General structure:
| Filing Status | Phaseout Begins | Fully Phased Out |
|---|---|---|
| Single | $100,000 MAGI | $150,000 MAGI |
| Married Filing Jointly | $200,000 MAGI | $250,000 MAGI |
Within the phaseout range, the deduction reduces gradually. Above the upper threshold, you can’t claim any of it. Check current IRS guidance for the precise phaseout formula in your tax year.
How to Actually Claim It
For tax year 2025 (filed in spring 2026):
- Calculate total qualifying interest paid during the year
- Verify your vehicle meets eligibility (VIN check for US assembly)
- Confirm your MAGI is in the eligible range
- Apply the phaseout calculation if applicable
- Enter the deduction on Form 1040, Schedule 1-A, Part IV — “No Tax on Car Loan Interest”
- Include the VIN on Schedule 1-A
For tax years 2026 and later, lenders are required to send borrowers a Form 1098-VLI (Vehicle Loan Interest Statement) by January 31 of each year showing total qualified interest paid. For 2025, lenders can use existing statements showing the total amount.
What Counts as Qualifying Interest
Only interest on a loan used to purchase the qualifying vehicle counts. Excluded:
- Interest on loans for used vehicles
- Interest on loans for ineligible vehicles (non-US assembly, over 14,000 lbs GVWR)
- Interest on lease payments (leases aren’t loans)
- Refinanced auto loans where the original loan didn’t qualify
- Interest paid by your employer or another party
The Math: How Much It Saves
The deduction is above-the-line, so it reduces your taxable income directly. The tax savings depend on your marginal tax rate.
A taxpayer in the 22% bracket who paid $4,000 of qualifying car loan interest saves $880 in federal tax. A taxpayer in the 32% bracket saves $1,280 on the same interest. State tax may add additional savings depending on your state’s conformity to federal rules.
For a typical buyer with a $40,000 new vehicle financed at 7% over 60 months, first-year interest runs around $2,600 — yielding $570–$830 in tax savings for most taxpayers.
Common Misunderstandings
“Any car loan qualifies.” No. New vehicles only, US final assembly required.
“I can deduct lease payments.” No. Leases don’t have deductible interest under this provision.
“I can deduct the principal too.” No. Only interest.
“This applies to existing loans.” Only loans originated after December 31, 2024.
“Used cars qualify if assembled in the US.” Used vehicles do not qualify under this provision.
Bottom Line
The new car loan interest deduction is a meaningful tax benefit for buyers of new, US-assembled vehicles in tax years 2025 through 2028. The savings aren’t huge for any single taxpayer — typically $500–$2,500 per year depending on loan size and tax bracket — but they’re real money for an asset most people would buy anyway. If you’re shopping for a new vehicle, verify the VIN before buying, confirm your income falls within eligibility, and keep your interest statements for tax filing.
