New Car Loan Interest Tax Deduction (2025–2028)
For the first time in U.S. tax law, the Internal Revenue Service now offers a vehicle loan interest deduction — a major benefit for consumers financing new automobiles. This provision was included in the One Big Beautiful Bill Act (OBBBA), enacted in July 2025, and is effective for tax years 2025 through 2028.
What Is the New Deduction?
Traditionally, interest deductions have been limited to mortgages and certain business expenses. The OBBBA introduces a new above-the-line deduction that allows individuals to deduct up to $10,000 per year in interest paid on qualifying vehicle loans.
Unlike mortgage interest deductions, which require itemizing, this deduction is available whether you:
- Take the standard deduction, or
- Itemize deductions on Schedule A
This change expands tax relief to everyday car buyers — not just taxpayers with complex financial situations.
Eligibility — What Vehicles and Loans Qualify
To claim this deduction, both the vehicle and the loan must meet specific criteria.
🚘 Vehicle Requirements
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Must be newly purchased between January 1, 2025, and December 31, 2028
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Must be for personal use only (not business or commercial use)
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Must be a passenger vehicle, including:
- Car
- SUV
- Pickup truck
- Van or minivan
- Motorcycle
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Vehicle must weigh under 14,000 pounds
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Must be assembled in the United States (verified by VIN or manufacturer label)
💳 Loan Requirements
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Loan must be used only to purchase the vehicle
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Must be secured by a lien on the vehicle
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Only interest is deductible (not principal, fees, or add-ons)
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Ineligible:
- Lease payments
- Loans for used vehicles
- Loans for imported vehicles
Income Phase-Out and Limitations
The deduction phases out for higher-income taxpayers:
- Begins phasing out at $100,000 MAGI for Single filers
- Begins phasing out at $200,000 MAGI for Married Filing Jointly
As income increases beyond these thresholds, the deductible amount is reduced. At higher income levels (generally around $150,000+ single or $250,000+ joint), the deduction may be fully eliminated.
How to Claim the Deduction
When filing your federal tax return:
- Claim the deduction as an above-the-line adjustment to income
- Your lender should provide Form 1098, reporting the interest paid
- Because this is a new provision, taxpayers should carefully review eligibility rules or consult a qualified tax professional
Why This Matters
A vehicle purchase is often one of the largest financial commitments households make after buying a home. With higher interest rates, auto loan interest can add up quickly.
This deduction:
- Reduces taxable income by up to $10,000
- May result in a lower tax bill or larger refund
- Applies even if you do not itemize deductions
- Encourages purchase of U.S.-assembled vehicles
This represents a meaningful policy shift aimed at easing costs for consumers while supporting domestic auto manufacturing.
The new car loan interest tax deduction is a legitimate IRS-recognized provision for tax years 2025 through 2028, allowing eligible taxpayers to deduct up to $10,000 in auto loan interest for qualifying new vehicles purchased for personal use.
If you’re planning to buy a new vehicle with financing, this deduction could significantly reduce your tax burden — even if you claim the standard deduction. Keeping accurate records and working with a knowledgeable tax professional will help ensure you receive the full benefit.