If you’re in the market for a new car, now may be the time to buy. Under the Big Beautiful Bill, signed into law on July 4, 2025, a new tax break allows borrowers to deduct up to $10,000 in car loan interest on their taxes. This benefit applies to new cars purchased between 2025 and 2028.
Unlike most deductions, this one can be claimed whether you itemize or take the standard deduction. But not every car or taxpayer will qualify.
And while the maximum deduction is set at $10,000, most auto loans don’t generate that much interest. The greatest benefit will likely go to buyers of higher-priced vehicles who finance larger loan amounts.
Here’s what you need to know about this auto loan tax break.
Who May Qualify for the New Car Loan Interest?
This deduction is available to all taxpayers, no matter if they itemize or use the standard deduction. However, eligibility is based on income:
- Single filers: Full deduction if modified adjusted gross income (MAGI) is $100,000 or less.
- Married couples filing jointly: Full deduction if MAGI is $200,000 or less.
Above these thresholds, the deduction phases out and is eliminated for higher-income taxpayers.
This provision is unique because it allows individuals to claim interest on a personal-use car loan — something typically not permitted under IRS rules.
Above these limits, the deduction phases out gradually and is eliminated for higher income individuals.
The new car loan interest deduction gives taxpayers the rare opportunity to claim interest on a personal-use vehicle — something typically not allowed under IRS rules. To maximize savings, consider pairing this benefit with the EV tax credit, which is scheduled to expire on September 30, 2025.
What Cars Qualify?
Not every vehicle will be eligible. To claim the car loan interest tax deduction, your purchase must meet these IRS rules:
- Financed between January 1, 2025 and December 31, 2028
- Final assembly must take place in the United States
- Vehicle must weigh under 10,000 pounds
- Used for personal (not business) purposes
- Classified as a car, minivan, SUV, pickup truck, or motorcycle
How to claim on your tax return?
Here’s the process to claim this new auto loan tax deduction:
- Your lender will send you Form 1098 by January 31, showing the total interest paid during the year.
- When filing your tax return, report this amount and include the vehicle identification number (VIN).
- Before buying, check the dealer label to confirm the vehicle’s final assembly was in the U.S.
- Keep all receipts and loan records in case of an IRS review.
Make sure to keep your receipts to take advantage of the new tax deduction. – Kemberley Washington, CPA
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