New Tax Break for Car Buyers Offers Loan Interest Deduction
If you joined the ranks of new car owners in the past year, there’s a tax break that might help you out. This deduction allows you to claim the interest paid on car loans.
This deduction was part of the Republican Party’s “Big and Beautiful Bill,” which President Trump announced last summer. He promoted it on the 2024 campaign trail as a way to make car ownership more affordable and to foster domestic auto manufacturing.
Experts believe this new deduction could ease financial burdens for car owners. Andrew Lautz, who leads tax policy at the Bipartisan Policy Center in Washington, D.C., mentioned that eligible taxpayers might save hundreds, if not thousands, through these deductions. Recent data from the Treasury Department indicates that many people could benefit from this deduction this year.
With car ownership expenses reaching unprecedented levels—around $750 per month, according to LendingTree—more consumers are falling behind on their payments, as highlighted by a recent VantageScore survey.
Lautz pointed out that there are specific conditions for the new auto loan tax deductions, so it’s wise for taxpayers to consult the IRS or a certified tax professional before claiming it.
This tax benefit is somewhat similar to the Mortgage Interest Deduction, which allows homeowners to deduct interest on up to $750,000 in mortgage debt, or $375,000 for those married filing separately.
Interestingly, Jeremy Robb, chief economist at Cox Automotive, noted that approximately 4 million of the 13.4 million new cars sold in the U.S. last year qualify for the tax credit. However, this deduction is only available for new car purchases; those who financed used cars or leased vehicles last year won’t qualify.
Robb estimates that a typical eligible buyer could claim around $4,000 in auto loan interest deductions on their tax returns.
Understanding the Auto Loan Deduction
Details regarding the auto loan deduction are still being finalized by the IRS and the Treasury Department. Currently, tax authorities recommend that taxpayers rely on their reports for guidance on filing this year.
This new deduction allows taxpayers to deduct up to $10,000 annually in interest paid on loans for new American-made cars purchased last year. That $10,000 cap applies separately on each individual’s federal tax return. For example, if a married couple files separately, each can claim this limit on their respective returns.
Only vehicles intended for personal use qualify for this deduction. Additionally, eligible vehicles must undergo their final assembly in the United States, referring to where the vehicle is physically put together before being sent to dealers.
To verify the manufacturing details of their vehicle, taxpayers can check the National Highway Traffic Safety Administration’s Vehicle Identification Number database.
Income Limits for the Deduction
Single taxpayers with a modified adjusted gross income (MAGI) of up to $100,000 and married couples with a MAGI of up to $200,000 can claim the full deduction. (MAGI adds tax-free income to the adjusted gross income. The IRS provides more information on how to calculate it.) For every $1,000 of income above these thresholds, the deduction amount is reduced by $200.
This deduction is available for both those who take the standard deduction and those who itemize. According to the IRS, these deductions can lower taxable income and ultimately reduce the overall tax bill.
How to Claim the Deduction
To take advantage of the auto loan deduction, H&R Block advises taxpayers to gather their 2025 auto loan statements. Next, they need to complete the Schedule 1-A form, filling in details about their income, loan, and VIN before submitting it with their tax return.
Deadline for Claiming the Deduction
The auto loan deduction applies to new car purchases made between January 1, 2025, and December 31, 2028. These tax cuts are slated to expire after 2028.
Potential Savings from the Deduction
Experts suggest that the average car buyer might save hundreds or even thousands in taxes due to this new auto loan deduction, though the exact savings will hinge on the buyer’s income and the amount of the car loan.
Moreover, the Financial Services Association has estimated that qualifying car buyers with a six-year auto loan at an interest rate of 6.5% could deduct about $3,000 in the first year of ownership and around $1,800 in subsequent years.
